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Gideon Rose speaks with Martin Feldstein and Alan Binder about the fiscal cliff and deals to avert it.
The editor of Foreign Affairs interviews the author of "The Failure of the Euro."
The collapse of the euro is no accident; the seeds of the crisis were planted before the monetary union even began, argues a former chair of the Council of Economic Advisers. It never made sense to yoke so many different economies and cultures together—yet they now ﬁnd themselves trapped in a union that leaves no means of escape.
The defense budget of the United States, the world's leading military power throughout the twentieth century, is not enough for the country to confront the threats of the twenty-first. It should be increased -- and can be without negatively affecting the economy. The money is available; it must be joined by political will.
The U.S. savings rate has been falling for decades. But that downward trend will likely soon be reversed, as factors such as rising mortgage interest rates force Americans to start saving more. The change will ultimately be for the better, but in the short term it could cause serious problems for the United States and its trading partners unless they start preparing immediately.
The danger of Argentina's latest economic crisis is that the good policy choices of the past decade will be thrown out with the bad.
The global financial crisis of 1997-98 was neither the first of its kind nor the last. But this time, even the virtuous were not immune. The stricken countries desperately need a plan for protection in the future. The IMF is too strapped and its program too flawed to serve as an effective international lender of last resort. Instead, emerging markets must learn to inoculate themselves against future currency attacks by increasing liquidity, such as foreign currency reserves, so they can fight back the powerful forces of market speculation on their own. While self-help is expensive, it is far less painful than the turmoil of currency crises. Emerging markets must take their fate into their own hands.
Initially devised to maintain a system of fixed exchange rates, the IMF took on a new role during the Latin American debt crisis of the 1980s-providing moderate amounts of credit, facilitating debt renegotiations, and recommending responsible macroeconomic policies. But the IMF is also applying the lessons of Eastern Europe and the former Soviet Union, where a fundamental economic restructuring was necessary, to Asia. So in Korea, for example, the fund called for reform of inefficient conglomerates and inflexible labor laws. However beneficial in the long run, such changes are not needed to resolve the current crisis. By stepping in too far and too soon, the IMF discourages countries from seeking modest help. Even worse, it encourages bankers to undertake more risky loans, making another crisis more likely.
Jean Monnet's dream that European integration would eliminate conflict may have been a delusion. France and other countries do not share Germany's fixation on sound money -- or its hegemonic vision. A European central bank would be unresponsive to local unemployment, while political union would remove competitive pressures within Europe for structural reform, prompting protectionism and conflict with the United States. A Europe of 300 million people and an independent military might be a force for world peace, but war is also a distinct possibility.
By 2030, Social Security payroll tax rates will rise to 19 percent - more than 45 percent including Medicare and Medicaid. In Europe, which faces similar challenges, the burden of entitlement expenses is already so great as to slow economic growth. The solution is to phase out Social Security and other pay-as-you-go programs and replace them with a mandate for all to put away savings in a mix of stocks and bonds. Under a privatized system, the same benefits would require contributions equal to just two percent of U.S. payroll. Not only would the elderly be safe from poverty, but for the first time people of low and moderate means would accumulate significant personal savings.
The principal problem with which the world's economies must deal during the coming decade is the unsustainable imbalance of international trade. The United States cannot continue to have annual trade deficits of more than $100 billion, financed by an ever-increasing inflow of foreign capital. The U.S. trade deficit will therefore soon have to shrink and, as it does, the other countries of the world will experience a corresponding reduction in their trade surpluses. Indeed, within the next decade the United States will undoubtedly exchange its trade deficit for a trade surplus. The challenge is to achieve this rebalancing of world demand in a way that avoids both a decline in real economic activity and an increase in the rate of inflation.
During the past few years, the American economy has demonstrated impressive resiliency and America's economic performance has improved substantially. Inflation has dropped from 13 percent to four percent. The rise in unemployment that was an inevitable consequence of the accelerating inflation of the late 1970s has retreated to just a fraction over seven percent. And real GNP has increased more than 12 percent in the two years since the recovery began.