Clinton Has To Zero In On The Global Economy

It's time to change that famous sign on the wall of Clinton headquarters to read: "The international economy, stupid." While much of the economic debate between now and Jan. 20 will properly center on domestic issues--how much fiscal stimulus and what kind, how much deficit reduction and how fast--the deeper economic crisis that will confront the new President will be international.

The world's other great economic powers are now suffering from slow growth and political frustration. Every other member of the Group of Seven--Germany, Japan, France, Britain, Italy, and Canada--has a weakened government and no capacity for economic leadership. Germany, once the steward of European union, is today consumed with Eastern woes and racist ghosts. High German interest rates have all but wrecked the European Monetary System.

For a decade, the ems was a mini-Bretton Woods system of relatively stable currencies on one continent and the logical precursor to a single European currency. If European currencies held value relative to each other, that made it easier for entrepreneurs to treat the Continent as a single market. But the abolition of capital controls prior to the completion of monetary union, coupled with Germany's bout of introversion and tight money, has invited speculation, depressed investment, and derailed the whole system. French anxiety about unmanaged agriculture, meanwhile, is spoiling the General Agreement on Tariffs & Trade, and Britain's decrepit Tory Cabinet can't govern.

HARD STRADDLE. As for Japan, its postwar political system is unraveling, and with it the Japanese economic miracle. The Japanese, who long benefited from a highly managed economy, have been pushed halfway toward a free-market economy. But they can't bring themselves to go all the way, and the straddle is becoming unbearable. Their stock market, buoyed by limited trading and artificially depressed interest rates, has been tumbling as rates move upward to global levels and investors act more like speculators. But since so much of Japan's wealth has been based on inflated stock and land prices, the government can't quite let the market rule. Exports have long been Japan's safety valve, but with slow global growth, that release is ending.

The former Soviet Union is, of course, an economic catastrophe. So are most of its former satellites. The Bush Administration took full--some would say fulsome--credit for the collapse of Bolshevism but then turned its back on the economic aftermath. With the end of totalitarianism, ethnic hatreds in the Balkans and elsewhere would have risen anyway, but economic depression makes them that much more intense. Neo-Nazism, likewise, was a risk in Eastern Germany, but 30% unemployment, coupled with a flow of economic refugees, fans the flames.

What's needed is a massive global recovery program--one that only American leadership can provide. Still, while privatization can help shake loose the cobwebs of former command economies, simplistic laissez-faire will produce only chaos. The Clinton Administration should study the contrast between the postwar periods of World Wars I and II. In the first case, the U.S. withdrew and the global economy spun into depression, financial chaos, and another war. In the second case, having learned from history, having embraced economic management, and worried about the Red Army, the U.S. moved boldly. The result was a quarter century of stability and prosperity.

BOLD PLAN. For starters, the Clinton Administration should revive the G-7. Under Treasury Secretary James A. Baker, the G-7 mechanism made a promising start, enlisting the major economies to pull in the same direction. After Baker left Treasury in 1988, the G-7 languished. Clinton needs to revive it and win a joint commitment for currency management, lower interest rates, and sustained growth.

Second, the new Administration should sponsor a Western commitment--of Marshall Plan proportions--to recovery in the former communist world. Only if the West puts serious resources on the table will the East begin a serious planning process to complete the shift from a command to a mixed economy. This commitment needn't burden the U.S. taxpayer unduly. If the World Bank and the International Monetary Fund are restored to the role envisioned when they were founded at Bretton Woods--as agents of growth rather than austerity--they can be authorized to create new credits to finance redevelopment of the East. The creation of credit to revive a moribund economy needn't be inflationary.

Third, let's wrap up the gatt round but abandon the premise that the only good recipe is perfectly free trade. Most other capitalist nations want a managed brand of capitalism, not laissez-faire. They use development and technology subsidies, business-government partnerships, and a degree of managed agriculture to protect farmers from periodic bankruptcy. If a mixed economy is so toxic, why did it work so brilliantly in the quarter century after World War II? The need is for common rules, but not necessarily those of Adam Smith.

Before it's here, it's on the Bloomberg Terminal.