|WASHINGTON -- If the world is enduring the worst financial crisis since
the Depression, as President Clinton says, is there a modern John Maynard
Keynes to show us the path back to prosperity?
Keynes, of course, was the British intellectual, civil servant and bon vivant who challenged economic orthodoxy to explain the Depression and tried, with mixed success, to convince Franklin D. Roosevelt the solution was heavy government spending. World War II defense spending ultimately proved his case.
Unfortunately, no one among the many commentators in academia, government bureaucracies or investment banks has yet emerged with the cure to the virulent combination of financial fright, crumbling banks and Asian recession threatening the international economic order Keynes himself helped craft after World War II.
So the U.S. government and the International Monetary Fund are tinkering with their original formula: cobbling together multibillion-dollar loans to countries whose currencies are under attack, in exchange for promises to pursue economic rectitude. The latest wrinkle: an evolving scheme to couple big private-sector loans to embattled Latin American countries with newfangled guarantees by the World Bank and its sister agencies. But at least three American economists see themselves as modern mini-Keyneses: Paul Krugman, 45 years old, a sharp-tongued professor at the Massachusetts Institute of Technology; Jeffrey Sachs, 43, an ardent Harvard professor who could be the most popular U.S. economist in the developing world; and Joseph Stiglitz, 55, a puckish Stanford professor now serving a stint as the World Bank's top economist.
Like Keynes, they are using academic forums and the popular press to challenge what they consider a dangerously flawed approach to economic emergency. Also like him, they are passionate, persistent and nasty to intellectual antagonists.
"Keynes was someone who read political currents, saw what might work and integrated economic theory into those political currents," says David Colander, an economic historian at Middlebury College in Vermont. "That's what you're seeing with Krugman, Sachs and Stiglitz."
Mr. Krugman has become the somewhat-chagrined standard-bearer for those who favor government-imposed controls to keep money from flowing out of emerging markets. Mr. Sachs preaches the benefits of letting currencies fall instead of strangling economies with tight budgets and high interest rates to try to prop the money up. Mr. Stiglitz, constrained in his comments by his post at the World Bank, is somewhere in between.
Of course, it is easier to criticize policy from the outside than to wrestle with the political and practical constraints that weigh heavily upon those on the inside. If Deputy Treasury Secretary Lawrence Summers and Deputy IMF chief Stanley Fischer were still academics in Cambridge, Mass., they probably would be dispensing lots of provocative criticism as well. But in their official positions, they define the prevailing orthodoxy. Meanwhile, Mr. Krugman, Mr. Sachs and to a lesser degree Mr. Stiglitz can second-guess their former colleagues; they don't have to decide this afternoon what to do to keep financial markets from ravaging Brazil or push plans through a skeptical Congress.
From his corner office at the Treasury, Robert Rubin displays uncharacteristic impatience with his critics, shaking his head and rising from his chair to check the markets on a screen when a reporter asks about some of Mr. Sachs's criticisms.
Mr. Rubin says he has two big tasks now. The first is to "minimize the damage as the world works its way out of the excesses" of lending and speculation that almost inevitably led to the crisis. And, second, "to focus on how the architecture or framework of the global financial system is going to change over time ... to deal with the next crisis."
For the past few weeks, the Treasury, IMF and World Bank have been laboring
to arrest the crisis by differentiating Brazil from Russia and other countries
that have fallen. In a carefully choreographed effort, Mr. Clinton, Mr.
Rubin, the IMF and the World Bank have issued statements of support for
Brazil and worked to assemble a financial backstop in case it is needed.
So what would professors Krugman, Sachs and Stiglitz do differently? How, for instance, would they advise Brazil, whose troubles are the most pressing question on the economic agenda at the moment? "This is a really agonizing issue," Mr. Krugman says. Citing Brazil's president, he says, "If I were Cardoso, I would probably try to tough it out-defend the real, announce a big budget austerity program and hope for a miracle. If I were Rubin, I'd scrape up a credit line for Brazil."
In fact, that is the plan the IMF and Treasury are pushing, and it may worsen Brazil's economic downturn. Mr. Krugman understands the bind, and also favors what is heresy to the economic establishment: Temporary controls on the outflow of money from Brazil. "Whether they are workable is another issue," he says. "I think yes, but not with 100% certainty."
Mr. Sachs vigorously objects to controls on the outflow of money, which he says will damage countries that impose them and, probably, the world economy. His advice to Brazil: Stop defending the real. Just let it fall. Shrink the budget deficit, but avoid the lofty interest rates needed to protect the currency. "Anybody with money in Brazil isn't very enamored with this," he says. "One by one, countries are being knocked off the dollar standard. Those who are pushed off in times of crisis -- like those who stayed on the gold standard until the bitter end -- are hurt most."
Despite worries to the contrary in Washington and in Latin capitals, a Brazilian devaluation wouldn't necessarily lead to high inflation or do much damage to Mexico or Chile, Mr. Sachs says. It would pose a big problem for Argentina, whose currency is tied tightly to the dollar, but Mr. Sachs says dozens of other lands shouldn't be forced into deep recessions to preserve fixed exchange rates in two places, Argentina and Hong Kong.
Mr. Stiglitz, because his World Bank post means that his words are likely
to be misconstrued as official policy, is hesitant to dispense much public
advice. He has emphasized that Brazil was already doing the sorts of things
the IMF advises -- trying to cut government budgets, for instance -- even
before it came under attack. He has noted that Brazil's budget deficit
Other economists scoff at the three men's depiction of Brazil as victim. "Brazil requires extra strong doses of old IMF medicine," namely, deep budget cutting, says Sebastian Edwards, an economist at the University of California at Los Angeles and formerly the World Bank's top economist for Latin America. "Brazil talks the right talk and does the opposite. The IMF has to be extra tough."
Here is a closer look each of the three would-be Keyneses:
PAUL KRUGMAN got his Ph.D. at M.I.T. and earned his academic stripes writing about the theory of international trade; he has done little "really serious empirical work," he admits. But he has become a pundit, seeking to influence opinion with trenchant and sometimes-acerbic essays, all of which are posted on his Web site.
"My belief is that if an op-ed or column doesn't greatly upset a substantial number of people, the author has wasted the space," he once wrote.
An early skeptic of the Asian economic miracle, Mr. Krugman suggested
in 1994 there was no magic formula in Asia, just lots of sweat and capital.
But he concedes he never imagined the sudden end to prosperity that has
occurred. The basic problem, he reasons, is that investors are now much
freer to put money in and pull it out of emerging markets. "When recession
All the choices confronting emerging-market economies now are bad ones,
he says. The official advice strains the economic and political fabric
in countries that try it, he says; the advice to let currencies fall is
a vain hope that financial markets will treat Brazil or Thailand as if
they were Britain or the U.S.; and capital controls "disrupt normal trading
But the third, Mr. Krugman argues, is the least-bad option. He favors both taxes that restrict the inflow of capital, such as Chile has, and rules that block local banks and businesses from moving money out.
To Mr. Krugman's horror, Malaysian Prime Minister Mahathir Mohamed, who blames the West and financial markets for most of Malaysia's ills, was the first to take his advice. "It is all too possible that he will abuse capital controls because he is much too enthusiastic, and thereby discredit the idea," Mr. Krugman says.
He also preaches that Japan ought to try what sounds like heresy to modern central bankers: Create inflationary expectations so consumers and companies will want to borrow again, and let the yen fall. The Treasury, in contrast, fears that a weaker yen not only would hurt Japan's financial system, but could provoke a Chinese devaluation and even more chaos.
JEFFREY SACHS, who did both his undergraduate and graduate work at Harvard, has advised governments from Bolivia to Indonesia to Poland. He says he tolerated the IMF while working to transform Eastern Europe but has never forgiven the agency for its handling of Russia, another of his clients. He now attacks the IMF with the venom of an estranged spouse, sputtering about decisions that an IMF Russia expert made back in 1991.
Likening the Asian crisis to a bank run, Mr. Sachs argues that the IMF approach made things worse, not better, by pushing for so many changes in government economic policies in east Asia. In the past, the IMF pressured governments to do what seemed the right thing.
"When there is no private sector watching, it's a game," Mr. Sachs says. "They ask for 25% or 50% more than they can get. But when you do this with billions of dollars of short-term money watching, the consequences are disastrous."
The Treasury and the IMF say they ask only for what is necessary, and they argue that confidence in Asian economies can't be restored without fundamentally restructuring the systems of finance and government that created the problems.
Mr. Sachs has long called for "bolder approaches" to lifting the crushing debt burdens of Asian companies and banks, such as across-the-board write-downs or programs to encourage lenders to accept equity in exchange for debt forgiveness. Such proposals now are drawing increasing favor at the Treasury and the IMF, a situation Mr. Sachs enjoys immensely.
JOSEPH STIGLITZ, an M.I.T.-trained Wunderkind who became a full professor at Yale at age 26, is known for his theoretical work on the economics of information and the ways markets don't work quite as well as textbooks suggest. He joined Mr. Clinton's Council of Economic Advisers in 1993 and served as chairman for a time. But he never mastered Beltway politics, partly because he seems unable to answer any question without a thoughtful, 50-minute lecture that exceeds the attention span even of Clinton policy wonks. Since taking the World Bank job in February 1997, he has antagonized the administration and the IMF with critiques of their approach that, they say, outsiders sometimes confuse with official advice. In response, Mr. Stiglitz has tried to temper his public statements.
Mixing Keynesian analysis with modern thinking about finance, Mr. Stiglitz presented an academic-style assault on the Treasury-IMF orthodoxy at the Brookings Institution last month. He argued that fiscal belt-tightening and high interest rates didn't make sense in east Asian lands because they had financial crises, which are worse than and different from conventional problems of fiscal profligacy and inflation.
Financial institutions aren't a sideshow -- they are the main event,
he says repeatedly. He used to criticize The Wall Street Journal for creating
a separate Money & Investing section because it "reinforced the wrong
view" that finance was separable.
"One might argue that if not for the bailouts, they might have been even worse off, but the evidence on that is certainly not clear."
And what about John Maynard Keynes himself? The economist, who died in 1946, fell from grace in the late 1970s and early 1980s as his followers in governments around the world couldn't easily understand or cure inflation. But the current talk of deflation, global overcapacity and irrational financial markets harks back to the Depression-era issues he confronted.
Although his masterwork, the "General Theory of Employment, Interest and Money," wasn't published until 1937, Keynes was writing in such publications as Redbook and Vanity Fair to try to spur the Roosevelt administration to spend massively.
Unreconstructed Keynesians are offering similar advice today. George Akerlof, a Brookings Institution economist of the Keynesian persuasion, blasts as "pennyante plans" even the proposals offered by the critics. What would Keynes suggest? "A standard application of Keynesian fiscal stimulus," Mr. Akerlof says. But the afflicted countries can't borrow the money that is necessary, so the U.S., Japan and Europe should raise all of $700 billion on their behalf, with the debt to be paid off by added tax revenue that would result from restoring them to prosperity.
Mr. Akerlof has the ear of the powerful. His wife, Janet Yellen, is
Mr. Clinton's chief economic adviser. But she thinks the idea is crazy.
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