It's Still the Economy, Mr. President
DAVIDSON, PAUL
THE GLOBAL DIMENSION It's Still the Economy, Mr. President BY PAUL DAVIDSON In his first news conference (on November 12) following the election, President-elect Bill Clinton announced...
...3. The exchange rate between each nation's currency and the IMCU is set initially by each nation—just as it would be under an international gold standard...
...For example, if a U.S...
...importer requires French francs to pay for Bordeaux wine, she would pay dollars to her bank...
...But unless President Clinton searches for unconventional solutions to the chronic economic problem it addresses, his Administration—like the Bush, Carter, and Ford Administrations —is doomed to fail conventionally...
...It will not be easy to go against the conventional wisdom, but it is possible, and the result could be a system that benefits every nation by promoting global economic growth and full employment...
...Enter the Federal Reserve, which will now have two excuses for raising interest rates: (a) to defend the dollar in foreign exchange markets, and (b) to stamp out the inflationary sparks before they produce a conflagration...
...Yet even assuming that the Clinton Administration—despite the dire warnings of deficit-phobes like Senator Warren B. Rudman (R-N.H...
...In that case, the U.S...
...Exchange rate variability per se could no longer lead to an industry losing its global competitiveness simply because its currency is overvalued—as happened in the American "rust belt" during 198285, when the dollar increased dramatically in value...
...Our international creditor position evaporated, because foreign aid now exceeded the U.S...
...The trigger mechanism gives debtor nations the ability to avoid deficits by increasing their opportunities to sell exports and earn additional income...
...Driving a car while pressing simultaneously on the brake and the accelerator may permit some forward movement, but it cannot be good for the vehicle...
...The situation will be akin to Clinton stepping harder on a car's accelerator to speed it up as Alan Greenspan's Federal Reserve steps on the brake to slow it down...
...Europeans were forced to make huge purchases to feed themselves as well as to rebuild their factories and infrastructure...
...The Bretton Woods years also witnessed greater overall price level stability than any period before or after...
...exports may decline in the near term where the increased value of the dollar is making certain American products less competitive...
...All IMCUs are held only by the central banks of member nations as deposits at the clearing house...
...4. A trigger mechanism will encourage creditor nations to spend what has been stipulated (in advance) by the members to be an "excessive" clearing house credit balance...
...lost over $2 billion of its gold reserves...
...Indeed, during the 1947-73 stretch global economic performance was spectacular...
...Many will complain that the fivepoint proposal I have outlined is too Utopian...
...But isolating the U.S...
...Nations that steadily run trade surpluses are earning income they refuse to spend, and in so doing are creating unemployment in the export industries of their trading partners...
...If we are to have another global golden age, we have to construct a new international monetary system around an institution for settling international payments...
...But when taxpayers fill out their 1040 forms for the year, many will find they have been underwithheld and will have to cut back on spending to meet their tax liability next April 15...
...As the dollar declines, U.S...
...There are two main reasons for this potential new dip...
...To gain international cooperation, the clearing house would not require any nation to surrender control of its domestic banking system or its fiscal policy...
...To prevent political chaos in Western Europe, the United States offered to pay for the trade deficits Europe had to incur through the Marshall Plan and other aid programs...
...The OECD countries have suffered recurrent bouts of unemployment and inflationary crises that have inhibited growth...
...exports...
...Instead, these creditor nations converted a portion of their annual dollar export earnings into calls on U.S...
...This last resort confiscatory action by the pro bono managers of the clearing house will make the adjustment based on an international decision to provide a Marshall Plan to the debtors...
...Therefore, all major private international transactions must clear between the central banks' deposit accounts...
...The Federal Reserve would settle the importer's debt by transferring IMCUs from its account at the clearing house to the Bank of France's account...
...Employment and per capita GNP grew continuously between 1947 and 1957, as foreign aid funds financed additional demand for U.S...
...The Catch22 was that European industries could not produce enough for their own countries' desperate needs, much less for export to earn dollars...
...The Bretton Woods era was marked by unprecedented global prosperity...
...One objective of such a plan should be a more orderly method for determining exchange rates...
...At current wage rates, this means that although more people will be working, each will be able to buy less...
...The seeds of Bretton Woods' destruction were sown, and the golden age of global economic development ended as the trade surplus nations continually drained gold reserves from the United States...
...It would appear, therefore, that if the other members of the Group of Seven nations are unable or unwilling to expand more rapidly, then under the present international payments mechanism we may be doomed to hang together with them in their stagnating rate of economic growth...
...Our experience with the 1930 Smoot-Hawley Tariff is evidence that such wars can only exacerbate global depression...
...The increased interest rates will discourage private investment even as the new Administration is trying to encourage it...
...Upon receipt of the IMCUs, the Bank of France would deposit the required francs in the French wine exporter's bank in Paris...
...Thus inflationary forces will begin to be reignited just as the Clinton economic growth package bites...
...Her banker would then send these dollars (less his commission) to the Federal Reserve...
...If, for instance, nation A is experiencing 5 per cent inflation, then A's central bank will have to provide 5 per cent more units of domestic currency for every IMCU offered to it...
...The Marshall Plan alone gave away a total of $ 13 billion in four years (over $ 105 billion in 1992 dollars...
...Meanwhile, the small upturn in the last half of 1992—albeit too anemic to make the slightest dent in unemployment—has prompted some to suggest that the focus should now be shifted from creating jobs to reducing the even larger than projected deficit...
...From these facts it is clear that fixed exchange rate systems are associated with better global economic performance than flexible systems...
...It is just possible that, once it is settled in the corridors of power, the Clinton economic team will worry about its reputation among the financial market makers and shakers...
...So merely to prevent the economy from stumbling again in early '93, Clinton must quickly create additional jobs and income earning opportunities to offset the probable decline in consumer spending and the softness of our export markets...
...had been playing since 1947...
...For as Keynes warned, "Worldly wisdom teaches that it is better to fail conventionally than to succeed unconventionally...
...military and financial aid responses to the Berlin Wall crisis and Vietnam accelerated the trend...
...Had the belt-tightening been undertaken, it would have further depressed Western Europe's War-torn standard of living...
...An analysis of economic performance differences over the last two centuries under various international monetary schemes offers some key design clues...
...closed the gold window and unilaterally withdrew from Bretton Woods, the last vestige of a potentially enlightened international monetary approach was lost—apparently without regret or regard as to how well it had served the global economy...
...This, in turn, is bound to set off speculative pressure against the dollar on foreign exchange markets, causing it to fall...
...and Ross Perot—gets the fiscal legislation it wants in its first 100 days, will the stimulus be sufficient to permanently rejuvenate the economy...
...In the unlikely event that a surplus nation does not spend or give away all these credits within a specified time, the clearing house will confiscate the remainder for redistribution to debtor members...
...Nevertheless, American consumers experienced no real pain...
...Flexible exchange rate systems operated much of the time between the two World Wars, and have prevailed since 1973...
...Real GNP per capita in the Organization for Economic Cooperation and Development (OECD) countries grew 2.6 times faster than between the Wars...
...Under any conventional international monetary system, once the Europeans exhausted their reserves they would have had to suffer the burden of "tightening their belts"—i.e., reducing imports to what they could earn from exports...
...Before World War I under the gold standard, and between 1947-73 under the Bretton Woods Agreement, a fixed exchange rate governed international trade...
...will be subjected to a continuation of the slow growth recessionary experience that plagued the Bush Administration...
...Paul Davidson, a past NL contributor, holds the Holly Chair of Excellence in Political Economy at the University of Tennessee, Knoxville, and is editor of the Journal of Post Keynesian Economics...
...In 1958 alone, the U.S...
...In periods of uncertainty, the present system is defective because it permits exchange rates to be moved by speculative bubbles—that is, by massive speculative capital flows searching for quick profit in the hopes of outwitting the crowd and beating the gun...
...This would have caused political upheavals across the Continent, not to mention a recession in America's export industries...
...As we shall see, perhaps the most important of them suggests transferring the onus for reducing trade deficits from the debtor to the creditor counlries—and thereby substituting expansionist for contractionist pressure...
...Europe's productive capacity was ravaged in World War II...
...Because of the contributions foreign nations made to the U.S...
...With an improved economic growth rate, import demand could easily push our international payments deficit to $40 billion in the first half of '93...
...Worse, the Clinton Administration will impose on the American people the misery index magnitudes (obtained by adding the unemployment rate and the inflation rate) that made Jimmy Carter's Presidency so unpopular...
...Will Bill Clinton, as Jimmy Carter did before him, accept the conventional wisdom in economics and permit policies that foster unemployment in order not to upset the domestic and international financial markets...
...Conventional belt tightening depresses the economies of both deficit and creditor nations...
...5. The initially fixed exchange rates between national currency and the IMCU will be devalued only to reflect inflationary increases in the domestic costs of producing goods...
...gold...
...In the developing nations, the debt-burdened growth and/or stagnation (and even falling real GNP per capita) since 1973 contrasts sharply with their experience in the previous two and a half decades...
...economy by introducing prohibitive tariffs will simply encourage our trading partners to retaliate as each tries to export its unemployment...
...At the option of the creditor, excessive credits can be spent in any combination of three ways: (1) on the exports of another clearing house member, (2) on direct foreign investment projects, and (3) to provide a Marshall Plan form of foreign aid to deficit members...
...This was almost double the previous peak annual growth rate of the industrializing nations throughout the entire Industrial Revolution, and productivity growth was more than triple that of the Industrial Revolution...
...But by 1958 the party was over...
...Why were the Bretton Woods years unique...
...economic growth at a faster rate than that of our recessionary trading partners is doomed to fail because of the consequent international payments imbalance (or what economists call the "balance of payments constraint...
...real GNP per capita was 25 per cent higher than in 1940 (the last peacetime year...
...But it retains considerable discretion in deciding how to employ the credits in its citizens' best interests...
...Under the trigger mechanism, excessive credits become the Black Queen in an international game of Old Maid and must be passed on to others who can make better use of her...
...By comparison, the economic record between the World Wars was poor, and since 1973 it has been dismal...
...Regrettably, Bretton Woods made no provision for automatically encouraging emerging surplus nations to step into the adjustment role the U.S...
...Will he accept the conventional wisdom of most insidethe-Beltway think-tank experts who say the only proper response to the threat of a rising trade deficit is to tighten the country's belt...
...That will push our international payments imbalance into a significantly larger deficit than we experienced in the last two Bush years...
...Moreover, U.S...
...This will assure that IMCU holdings will never lose purchasing power in terms of buying foreign produced goods...
...In the first year of the Marshall Plan, U.S...
...The fatter paychecks helped to maintain (and perhaps actually increased) sales and employment in '92...
...Proviso 4 recognizes that, in any conventional international monetary system, a nation may experience persistent trade deficits simply because its trading partners are not living up to their means —i.e., other nations are not spending all their export earnings...
...One beneficial effect of fixing exchange rates in accordance with provisos 3 and 5 is that this eliminates the possibility of a specific industry in any nation being put at a competitive disadvantage (or securing a competitive advantage) against foreign producers solely because of fluctuations that are independent of inflationary changes in domestic production costs...
...More specifically, the new institution's prospectus might read as follows: 1. The ultimate reserve asset for international transactions is the International Money Clearing Unit (IMCU...
...The answer, unfortunately, is no...
...The new Administration must be prepared to lead the world by designing a way to break that destructive pattern...
...2. Each nation's central bank guarantees one-way convertibility in terms of providing a specific number of units of domestic currency for any IMCU units offered to it by other central banks...
...trade surplus...
...The less developed nations benefited through world trade, aid and direct foreign investment...
...His short-term stimulus plan calls for an investment tax credit, accelerated highway construction expenditures, and additional spending on infrastructure...
...The outcome could be quite the opposite, though, if Clinton is prepared to proceed unconventionally and devise a fresh approach for reorganizing the international payments system...
...First, most of our trading partners are enmeshed in a stagnating recession that is dampening the prospects for all exports...
...The disruptive effects of speculative exchange rate swings can be devastating to the economic growth of all nations...
...consumers will pay higher domestic prices for goods possessing imported components...
...Unless the Clinton Administration sticks to its promised course, however, the meager growth of the past few months will end by late winter or early spring...
...Furthermore, the plan has to provide a built-in mechanism for resolving international payments imbalances in a globally expansionary manner...
...When the U.S...
...In the 1960s, increased U.S...
...In this international game, however, there are no losers...
...Its objective is to spur debtors to work their way out of debt...
...By using previously hoarded excess credits, a creditor nation helps to solve the balance of payments constraint problem, and also promotes global economic expansion and prosperity...
...But with unemployment receding workers will be in a stronger bargaining position to demand cost-of-living adjustments...
...Consequently, for the first time in its history, the United States did not suffer from a severe recession immediately after the cessation of a major war...
...As more people are put to work and profit opportunities expand, the demand for all goods including imports will surge while our exports are still in the doldrums...
...to help finance Desert Storm, and the '91-92 recession here that slowed the growth of imports, our international payments deficits were a relatively modest $3.6 billion in all of '91 and $24 billion in the first half of '92...
...This would essentially be a clearing house that oversees pre-agreed mechanisms for fixing the value of national currencies, and for encouraging countries with "excessive" credits at the clearing house as a result of persistently large trade surpluses to put those credits to work creating jobs around the world...
...In 1946, they sold almost all of their foreign reserves to pay for imports from the United States—the only nation that had available productive capacity...
...And the entire free world enjoyed an economic "free lunch" as both the debtors and the creditor nation gained from the "giveaway...
...Once set, this rate will remain unchanged except for conditions discussed in proviso 5 below...
...Economics will again be the dismal science, as the global economy stagnates its way into the 21st century...
...President BY PAUL DAVIDSON In his first news conference (on November 12) following the election, President-elect Bill Clinton announced that his highest priority will be the enactment of an economic recovery bill to stimulate job growth in the short run and deficit reduction in the long run...
...Annual per capita GNP growth for all developing nations was 3.3 per cent, more than triple the rate of the industrializing nations in the Industrial Revolution...
...And the crowning irony will be that the capitalist economies, having won the Cold War, will have lost the economic war...
...Many will urge Clinton to go it alone, to avoid an international trade deficit by using tariffs to keep out imports...
...Given this scenario, there is reason to ask whether any effort to stimulate U.S...
...That giveaway represented 2 per cent per annum of the United States' GNP (today, 2 per cent of our GNP is $ 120 billion...
...If Congress acts swiftly on the President's job creating initiatives, the economy will grow at a faster rate...
...In other words, those exports, produced by employing what otherwise would have been idle American workers and factories, created jobs and incomes for Americans...
...The current system forces nations to abandon expansionary policies and accept unemployment as the cost of maintaining balance of payments equilibrium...
...Second, last January President George Bush ordered the IRS to reduce payroll withholding taxes, giving workers an immediate boost in take-home pay—without lowering their tax liability...
Vol. 76 • January 1993 • No. 1
