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September 25, 1998
By DAVID WESSEL and
Staff Reporters of THE WALL STREETJOURNAL
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.
Harvard Institute for International Development
Jeffrey Sachs's Web page
World Bank Web Site
(Use the site's search facility to find speeches and information about World Bank Senior Vice President and Chief Economist Joseph Stiglitz.)
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.
It is important to note that Mr. Krugman and Mr. Stiglitz, and to a lesser extent Mr. Sachs, all come from the liberal side of the political spectrum. Conservatives who criticize the reigning orthodoxy are unlikely to propose Keynes-like solutions involving government action. For better or worse, Mr. Keynes and his modern counterparts provide the intellectual foundation for government activism to shield people from market mayhem. Many conservatives, such as Republican politicians Jack Kemp and Rep. Richard Armey, simply want governments to step aside so the market can work, with all its painful efficiency.
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 looks large primarily because its economy has slowed and interest rates are so high. And he has argued that if Brazil, given its strengths and the commitment of its leaders, can't fend off the market onslaught, then the structure of the international financial system needs to be rethought.
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.