Magazine article The American Prospect

Bush-League Economics: Our Bum Steers for Argentina and Japan. (below the Beltway)

Magazine article The American Prospect

Bush-League Economics: Our Bum Steers for Argentina and Japan. (below the Beltway)

Article excerpt

THE BUSH ADMINISTRATION is getting an A for its prosecution of the war against al-Qaeda and the Taliban, but it is flunking international economics. While energetically lobbying Congress for "fast track" authority (which is not a trade agreement, but merely a means of winning approval of one), it has botched every actual economic-policy challenge that it has faced. That was woefully apparent in its policies toward Argentina, but it has also been true of its policy toward Japan, the world's second-largest economy.

The Bush team, led by White House adviser Lawrence Lindsey and Secretary of the Treasury Paul O'Neill, have followed the same script each time a new crisis has beckoned. First, they deny that it is all that serious; then they deny that the United States--or international lending institutions--can do anything about it; then they put forth solutions that make things worse. Last summer, O'Neill insisted that Argentina's dire predicament was entirely its own doing and could be rectified without international help. "Nobody forced them to be what they are," he announced. In late October, he told The Wall Street Journal that if Argentina's economy did implode, it would not affect other nations. And then when leaders in Buenos Aires began to threaten default on foreign loans, O'Neill proposed a solution that ignored the roots of Argentina's problem. Instead of advising those leaders to abandon the bizarre nineteenth-century currency arrangement that American-trained free-market economists had imposed, O'Neill and the Bush administration insisted that Argentina slash social spending as a condition of international aid. When the government complied, eliminating 28,000 jobs, the people rioted and the government fell.

The administration has followed a similarly inept course toward Japan. During the 2000 campaign and in the months after the election, Bush's advisers sharply criticized Clinton's secretaries of the Treasury, Robert Rubin and Lawrence Summers, for using public pressure and criticism (gaiatsu) to force the Japanese to change their policies. "Gaiatsu has become a substitute for creative thinking," Lindsey explained. O'Neill declared that there was no "O'Neill plan" for Japan. "I'm not going to tell them how to pursue a monetary policy," he said.

As Japan slid this fall into its fourth recession in a decade, and as deflation took hold, threatening a 1930s-style Depression that could infect Asia and the United States, the administration reversed itself and began using its own brand of gaiatsu. In a speech in October to the Council on Foreign Relations in New York, U.S. Trade Representative Robert Zoellick declared that "there's a paralysis in Japan, and it's a serious problem. I mean, it's a serious problem in terms of the domestic economy, it's a serious problem in terms of East Asia and the world economy, and we're seeing it now." Zoellick's speech, which was widely covered in Japan, was followed by a speech by Deputy Treasury Secretary Kenneth Dam urging the Japanese to do something "swiftly" and "efficiently" about their massive overhang of bad bank loans. Meanwhile, Lindsey chimed in with advice of his own.

But while the Bush policy makers spoke with one voice to the Argentineans, they gave conflicting advice to the Japanese, betraying their own confusion and uncertainty about what Japan should do. Especially vexing was the critical relationship between the yen and the dollar. Since World War II, Japan's economy has been driven by industrial export earnings. Japan's modern version of mercantilism depended not only on the sacrifice and productivity of Japanese workers but also on the low value of the yen relative to the dollar, a factor that ensured that the prices of Japanese goods would be competitive with goods priced in dollars.

In a normally functioning world economy, this strategy might not have worked. Ordinarily, when countries run trade surpluses, their currencies appreciate, making their exports more expensive and, in turn, reducing their surplus. …

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