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What the EU Needs Is a Copy of “The Federalist” Papers
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Los Angeles – It may be indelicate for an American to point out, but now that the start-up of Economic and Monetary Union has accelerated the European Union's pace toward full economic integration, the US experience may provide some useful lessons. Not that we do everything right or that we provide a precise model for the working of a somewhat similar economy, but some long-standing American economic interactions do resemble those developing on the old Continent.
In at least three areas of economics – monetary policy, taxes, and fiscal policy – we've been there, done that. Together, the three may also provide some hints about political confederation.
• In the realm of monetary policy the European Central Bank can learn from the Federal Reserve, if it is willing to. The Fed's ability to maintain its integrity while paying due deference to the democratically elected authorities with which it works provides a model more appropriate to a complex economy than does the haughty independence of the Bundesbank. The single-minded Bundesbank ideology – price stability-uber-alles – cannot work in a Europe where recession threatens to increase already high unemployment; the Fed's pragmatic willingness to bring growth and employment into the balance can.
• The lessons for tax policy are less direct. What is thought of, as tax policy in the United States cannot exist in the European Union because the EU levies no taxes of its own? It is financed by contributions from the member states, which use their tax revenues to support the EU budget as well as their much larger national needs. Although political infighting over relative contributions is inevitable, EU members have also been squabbling over “harmonization” of national taxes – setting EU-wide rules for rates and regulations.
The American experience suggests that this is quite unnecessary. The US Constitution provides few constraints on the ways in which the states may raise revenues: they can legally levy income taxes, corporate taxes, sales taxes and property taxes on their individual and corporate residents at any rates they want, and they do. State taxes vary, but the variations stay within limits because the citizens and the companies in the states compete with one another.
The limits are imposed by economics, not legislation; they work and cause few quarrels. Similar natural limits are in fact becoming visible in Europe; the squabbles are unnecessary.
With monetary policy in the hands of the European Central Bank, fiscal policy – budget deficits and surpluses a la Keynes – is the remaining tool with which the member states of European Economic and Monetary Union, or EMU, can affect their own growth and employment. But such national autonomy is illusory however; the rules of monetary union limit deficits, and economic reality reinforces the rules. Before EMU a state could finance a deficit by borrowing from its own central bank. No longer.
The US model is again illuminating. The American states cannot run persistent deficits because they cannot borrow to finance those deficits, except at prohibitive interest rates. The federal government, however, can borrow from the Federal Reserve to finance immense deficits, has done so, and surely will again when economic downturn calls for fiscal stimulus. Except for one crucial difference, the government of EMU could similarly borrow from the central bank when dictated by Europe's needs – the difference, of course, being that there is no government of EMU.
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This leads to the possible lesson for political confederation. When recession suggests a continent-wide need for stimulus, the pressure will be on the member states to create some sort of joint fiscal decision-making mechanism. Such a mechanism will not be called a confederation but it will be a major step in that direction. It will raise the question of whether the mechanism should be used for making other joint decisions. That in turn should reraise the question of the “democratic deficit”; in particular, should the one body elected by European individuals, the Parliament, be given more power over such decisions?
The move will be on. At that point, an American might even have the temerity to suggest that Europeans read “The Federalist” papers.
2. What Happened to That “Global Architecture?”
When Brazil had devalued the real, the folks in Washington who claim responsibility for global monetary order were uncustomarily silent. One is tempted to say there was stunned silence, but that would imply that Brazil's move came as a surprise to the Treasury and the International Monetary Fund.
Surely it didn't, but there was another very good reason to keep quiet. Brazil had been a test case for that new global “financial architecture” that President Bill Clinton proclaimed to the world last fall. The real's collapse made abundantly clear what some of us had assumed: The promise of a “new architecture” was just more Bill Clinton hot air.
Of course, the hot air had a purpose, as do all of Mr. Clinton's skill fully crafted orations. He wasn't striving for “new architecture” as he claimed, but rather trying to save the old architecture, which was in danger of collapse. Specifically, he was trying to persuade the US Congress to cough up more money for the tottering IMF. The Brazil gambit was one of the arguments employed. If the IMF were not refinanced, it could not bail out Brazil and Brazil would go the way of the Asian tigers, with serious repercussions for the US and world economy.
The string of disasters midwifed by the global money managers is reflective not only of misjudgments but of a fatal flaw in the existing “architecture.” Mr. Clinton had the words right in September, he just didn't know the score. Either new architecture or no architecture at all is needed. But a president who spends most of his working hours figuring out how to buy votes with public money is not likely to be very critical of a multilateral agency that does pretty much the same thing. It subsidizes two very influential constituencies, international bankers and the profligate politicians who preside over such places as Russia, Indonesia and Brazil.
These bankers and politicians got the IMF's number a long time ago. They knew that institutions, like natural organisms, fight for self-preservation. The IMF keeps itself in business by winkling money out of rich nations such as the US and handing it out to the poorer brethren, who usually are poor because of gross economic mismanagement. In this age in which income transfers are deeply imbedded in politics, the IMF doesn't lack for clients.
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What is absent is any convincing evidence that this has made the world a better place. Africa appears to be regressing, despite the billions poured into it by the IMF, US aid agencies and the World Bank. Asia, acting partly on IMF and US Treasury advice, took a big step backward, in terms of living standards, with the 1997 devaluations, as did Mexico in 1994. The Brazilian and Russian governments, living well beyond their means, were shielded from reality for far too long. The people in such places now must pay a price and their politicians will blame everyone but themselves, including Bill Clinton and Michel Camdessus.
The IMF has proved that it is impossible to get good conduct from politicians by subsidizing their bad conduct. President Fernando Henrique Cardoso (Brazil) made himself very popular when he killed hyperinflation and gave his country a solid currency with the Real Plan. But he didn't follow through by reforming government itself. Had there been no international safety net supplied by an act of the US Congress, he might have seen fit to work harder. There should have been plenty of evidence around that monetary policy alone cannot compensate for governmental indiscipline.
So it's back to the drawing board for the US Treasury and the IMF – will they really come up with some new “architecture” this time, some thing like going out of the global management business? Don't count on it.
A Dangerous Gun Show
As we listen to the post-Littleton debate on gun control, it's impossible not to notice the enormous gap between the problem gun-control advocates describe and what their proposals can be expected to deliver. Childproof gun locks, requiring instant checks of buyers from licensed dealers at gun shows, holding adults liable for letting children get guns – none of these would have stopped the Littleton murderers, who planned their crime and assembled their arsenal for a year and violated several existing laws in the process. These proposed new laws would make only a marginal difference. The gun controllers' rhetoric, decrying the large number of guns in the United States and pointing out that gun deaths are much lower in countries that ban guns, makes much more sense as an argument for eliminating gun ownership altogether – which many gun controllers would like to do.
This misfit between problem and solution is typical of reformers, mostly liberal but some conservative. Gun-control advocates are not the only reformers whose solutions are tiny next to the problem they address and who ignore the practical difficulties of their unspoken agendas – while remaining uncurious about possible unanticipated consequences.
Consider advocates of the latest campaign finance bill, who decry the importance of money in politics and then propose new laws that will surely be evaded as previous laws have been. The problem is basic: In a big-government democracy, people will want to influence elections, out of idealism as well as self-interest, and they will spend money to do so. And they will be acting on a claim of right: the First Amendment. To which some campaign finance reformers respond: Get rid of the First Amendment. In March 1997, 38 senators voted to amend the First Amendment to allow campaign spending limits. Or as House Minority Leader Dick Gephardt put it: “What we have here is two important values in direct conflict: freedom of speech and our desire for healthy campaigns in a healthy democracy. You can't have both.” The Framers disagreed.
There is little evidence that gun-control advocates have given much thought to the practical difficulties of a serious gun ban. For the fact is that while the media lavish attention on marginal changes in federal gun-control laws, the great source of successful reforms in the 1990s is the states, which have been passing laws allowing law-abiding citizens, after a background check, to carry concealed weapons. Today 31 states, with 50 per cent of the nation's population, have such laws. None of the negative consequences predicted by gun controllers has come to pass. Instead, according to the most complete statistical study by University of Chicago economist John Lott, concealed-weapons laws have reduced crime. Citizens stop crimes 2 million times a year by brandishing guns, Lott writes, and criminals are deterred from attacking everybody because they know that a small number of intended victims will be armed. Lott's book, More Guns, Less Crime, presents a strong argument that more gun control would produce more crime.
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Even if sweeping gun control did not have that unintended consequence, it would be fiendishly difficult to enforce. There are some 240 million guns in America, most of them owned by people with a claim of right. And not a frivolous claim. The intellectually serious debate is over how far the Second Amendment right extends: Congress can surely ban the possession of nuclear weapons and surely cannot ban all handguns and rifles; the Second Amendment blocks the road somewhere in between. Earlier this month, former members of Congress Abner Mikva and Mickey Edwards, heads of a bipartisan committee, urged caution in pro posing constitutional amendments, and they are surely right in urging avoidance of triviality. What do they have to say to the reformers who would repeal the heart of the First Amendment and ignore the Second?
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