Martin Feldstein

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 danger of Argentina's latest economic crisis is that the good policy choices of the past decade will be thrown out with the bad.

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.

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.