Leszek Balcerowicz on America's mistakes and the better way to heal from a financial crisis

Leszek Balcerowicz: The Anti-Bernanke. By Matthew Kaminski
Leszek Balcerowicz, the man who saved Poland's economy, on America's mistakes and the better way to heal from a financial crisis.The Wall Street Journal, December 15, 2012, on page A15
http://online.wsj.com/article/SB10001424127887323981504578179310418828782.html

Warsaw

As an economic crisis manager, Leszek Balcerowicz has few peers. When communism fell in Europe, he pioneered "shock therapy" to slay hyperinflation and build a free market. In the late 1990s, he jammed a debt ceiling into his country's constitution, handcuffing future free spenders. When he was central-bank governor from 2001 to 2007, his hard-money policies avoided a credit boom and likely bust.

Poland was the only country in the European Union to avoid recession in 2009 and has been the fastest-growing EU economy since. Mr. Balcerowicz dwells little on this achievement. He sounds too busy in "battle"—his word—against bad policy.

"Most problems are the result of bad politics," he says. "In a democracy, you have lots of pressure groups to expand the state for reasons of money, ideology, etc. Even if they are angels in the government, which is not the case, if there is not a counterbalance in the form of proponents of limited government, then there will be a shift toward more statism and ultimately into stagnation and crisis."

Looking around the world, there is no shortage of questionable policies. A series of bailouts for Greece and others has saved the euro, but who knows for how long. EU leaders closed their summit in Brussels on Friday by deferring hard decisions on entrenching fiscal discipline and pro-growth policies. Across the Atlantic, Washington looks no closer to a "fiscal cliff" deal. And the Federal Reserve on Wednesday made a fourth foray into "quantitative easing" to keep real interest rates low by buying bonds and printing money.

As a former central banker, Mr. Balcerowicz struggles to find the appropriate word for Fed Chairman Ben Bernanke's latest invention: "Unprecedented," "a complete anathema," "more uncharted waters." He says such "unconventional" measures trap economies in an unvirtuous cycle. Bankers expect lower interest rates to spur growth. When that fails, as in Japan, they have no choice but to stick with easing.

"While the benefits of non-conventional [monetary] policies are short lived, the costs grow with time," he says. "The longer you practice these sorts of policies, the more difficult it is to exit it. Japan is trapped." Anemic Japan is the prime example, but now the U.S., Britain and potentially the European Central Bank are on the same road.

If he were in Mr. Bernanke's shoes, Mr. Balcerowicz says he'd rethink the link between easy money and economic growth. Over time, he says, lower interest rates and money printing presses harm the economy—though not necessarily or primarily through higher inflation.

First, Bernanke-style policies "weaken incentives for politicians to pursue structural reforms, including fiscal reforms," he says. "They can maintain large deficits at low current rates." It indulges the preference of many Western politicians for stimulus spending. It means they don't have to grapple as seriously with difficult choices, say, on Medicare.

Another unappreciated consequence of easy money, according to Mr. Balcerowicz, is the easing of pressure on the private economy to restructure. With low interest rates, large companies "can just refinance their loans," he says. Banks are happy to go along. Adjustments are delayed, markets distorted.

By his reading, the increasingly politicized Fed has in turn warped America's political discourse. The Lehman collapse did help clean up the financial sector, but not the government. Mr. Balcerowicz marvels that federal spending is still much higher than before the crisis, which isn't the case in Europe. "The greatest neglect in the U.S. is fiscal," he says. The dollar lets the U.S. "get a lot of cheap financing to finance bad policies," which is "dangerous to the world and perhaps dangerous to the U.S."

The Fed model is spreading. Earlier this fall, the European Central Bank announced an equally unprecedented plan to buy the bonds of distressed euro-zone countries. The bank, in essence, said it was willing to print any amount of euros to save the single currency.

Mr. Balcerowicz sides with the head of Germany's Bundesbank, the sole dissenter on the ECB board to the bond-buying scheme. He says it violates EU treaties. "And second, when the Fed is printing money, it is not buying bonds of distressed states like California—it's more general, it's spreading it," he says. "The ECB is engaging in regional policy. I don't think you can justify this."

"So they know better," says Mr. Balcerowicz, about the latest fads in central banking. "Risk premiums are too high—according to them! They are above the judgments of the markets. I remember this from socialism: 'We know better!'"

Mr. Balcerowicz, who is 65, was raised in a state-planned Poland. He got a doctorate in economics, worked briefly at the Communist Party's Institute of Marxism-Leninism, and advised the Solidarity trade union before the imposition of martial law in 1981. He came to prominence in 1989 as the father of the "Balcerowicz Plan." Overnight, prices were freed, subsidies were slashed and the zloty currency was made convertible. It was harsh medicine, but the Polish economy recovered faster than more gradual reformers in the old Soviet bloc.

Shock or no, Mr. Balcerowicz remains adamant that fixes are best implemented as quickly as possible. Europe's PIGS—Portugal, Italy, Greece, Spain—moved slowly. By contrast, Mr. Balcerowicz offers the BELLs: Bulgaria, Estonia, Latvia and Lithuania.

These EU countries went through a credit boom-bust after 2009. Their economies tanked, Latvia's alone by nearly 20% that year. Denied EU bailouts, these governments were forced to adopt harsher measures than Greece. Public spending was slashed, including for government salaries. The adjustment hurt but recovery came by 2010. The BELL GDP growth curves are V-shaped. The PIGS decline was less steep, but prolonged and worse over time.

The systemic changes in the BELLs took a while to work, yet Mr. Balcerowicz says the radical approach has another, short-run benefit. He calls it the "confidence effect." When markets saw governments implement the reforms, their borrowing costs dropped fast, while the yields for the PIGS kept rising.

Greece focused on raising taxes, putting off expenditure cuts. They got it backward, says Mr. Balcerowicz. "If you reduce through reform current spending, which is too excessive, you are far more likely to be successful with fiscal consolidation than if you increase taxes, which are already too high."

He adds: "Somehow the impression for many people is that increasing taxes is correct and reducing spending is incorrect. It is ideologically loaded." This applies in Greece, most of Europe and the current debate in the U.S.

During his various stints in government in Poland, the name Balcerowicz was often a curse word. In the 1990s, he was twice deputy prime minister and led the Freedom Union party. As a pol, his cool and abrasive style won him little love and cost him votes, even as his policies worked. At the central bank, he took lots of political heat for his tight monetary policy and wasn't asked to stay on after his term ended in 2007.

Mr. Balcerowicz admits he was an easy scapegoat. "People tend to personalize reforms. I don't mind. I take responsibility for the reforms I launched." He says he "understands politicians when they give in [on reform], but I do not accept it." It's up to the proponents of the free market to fight for their ideas and make politicians aware of the electoral cost of not reforming.

On bailouts, Mr. Balcerowicz strikes an agnostic note. They can mitigate a crisis—as long as they don't reduce the pressure to reform. The BELL vs. PIGS comparison suggests the bailouts have slowed reform, but he notes recent movement in southern Europe to deregulate labor markets, privatize and cut spending—in other words, serious steps to spur growth.

"Once the euro has been created," Mr. Balcerowicz says, "it's worth keeping it." The single currency is no different than the gold standard, "which worked pretty well," he says. In both cases, member countries have to keep their budget deficits in check and labor markets flexible to stay competitive. Which makes him cautiously optimistic on the euro.

"It's important to remember that six, eight, 10 years ago Germany was like Italy, and it reformed," he says. Before Berlin pushed through an overhaul of the welfare state, Germany was called the "sick man of Europe." "There are no European solutions for the Italians' problem. But there are Italian solutions. Not bailouts, but better policies."

Why do some countries change for the better in a crisis and others don't? Mr. Balcerowicz puts the "popular interpretation of the root causes" of the crisis high on the list.

"There is a lot of intellectual confusion," he says. "For example, the financial crisis has happened in the financial sector. Therefore the reason for the crisis must be something in the financial sector. Sounds logical, but it's not. It's like saying the reason you sneeze through your nose is your nose."

The markets didn't "fail" but were distorted by bad policies. He mentions "too big to fail," the Fed's easy money, Fannie Mae FNMA 0.00% and the housing boom. Those are the hard explanations. "Many people like cheap moralizing," he says. "What a pleasant feeling to condemn greed. It's popular."

"Generally in the West, intellectuals like to blame the markets," he says. "There is a widespread belief that crises occur in capitalism mostly. The word crisis is associated with the word capitalism. While if you look in a comparative way, you see that the largest economic and also human catastrophes happen in non-market systems, when there's a heavy concentration of political power—Stalin, Mao, the Khmer Rouge, many other cases."

Going back to the 19th century, industrializing economies recovered best after a crisis with no or limited intervention. Yet Keynesians continue to insist that only the state can compensate for the flaws of the market, he says.

"This idea that markets tend to fall into self-perpetuating crises and only wise government can extract the country out of this crisis implicitly assumes that you have two kinds of people. Normal people who are operating in the markets, and better people who work for the state. They deny human nature."

Gathering the essays for his new collection, "Discovering Freedom," Mr. Balcerowicz realized that "you don't need to read modern economists" to understand what's happening today. Hume, Smith, Hayek and Tocqueville are all there. He loves Madison's "angels" quote: "If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary."

This Polish academic sounds like he might not feel out of place at a U.S. tea party rally. He takes to the idea.

"Their essence is very good. Liberal media try to demonize them, but their instincts are good. Limited government. This is classic. This is James Madison. This is ultra-American! Absolutely."

Mr. Kaminski is a member of the Journal's editorial board.

Japan - Major political parties and their pledges

Japan - Major political parties and their pledges
Japan Today, Dec 16, 2012
http://www.japantoday.com/category/politics/view/major-political-parties-and-their-pledges

TOKYO — A dozen political parties and many independents will contest Sunday’s election. Here is a list of major parties and their campaign promises:

The Democratic Party of Japan is a centrist group that has governed Japan since 2009 after ousting long-governing conservatives from power.

Prime Minister Yoshihiko Noda serves as party president.

The DPJ is promising to:

—phase out nuclear power generation by the end of the 2030s.

—promote the Trans-Pacific Partnership free trade deal, along with a trilateral free trade pact with China and South Korea.

—work with the Bank of Japan to try to end deflation in fiscal 2014.

—boost measures to protect Japanese territory, including islands in disputes with neighbouring nations.

The Liberal Democratic Party is Japan’s main conservative force which ruled the nation almost continuously from 1955 to 2009.

LDP president Shinzo Abe is a hawkish ideologue who was prime minister in 2006-7.

The LDP has pledged to:

—review all nuclear reactors in three years to decide whether to restart them.

—decide within 10 years Japan’s new energy mix, which may or may not include nuclear power generation.

—achieve three-percent nominal economic growth.

—set an inflation target of two percent and may review the Bank of Japan law to push the central bank to take further easing measures.

—strengthen Japan’s administration of islands that China claims.

—expand the Self Defense Forces and rename them National Defense Forces.

—cut more than 2.8 trillion yen in public spending by reducing welfare and government personnel costs.

—conduct a 10-year program to make infrastructure disaster-resistant.

The Japan Restoration Party was launched this year, originally under reformist Osaka mayor Toru Hashimoto. It is now headed by controversial ex-governor of Tokyo Shintaro Ishihara.

The JRP was born out of a coalition of small parties with varying ideological backgrounds, and is united in its aim to take power from established parties.

The JRP has promised to:

—draft a new constitution to replace the current one written by the United States shortly after World War II.

—achieve three percent nominal growth and two percent inflation.

—join negotiations for the Trans-Pacific Partnership free trade talks.

—reduce parliamentarians’ salary and seats.

—end reliance on nuclear power.

—aggressively push for decentralisation of power.

The Japan Future Party was launched after the election was called in mid-November. It is headed by Shiga prefecture governor Yukiko Kada on an anti-nuclear platform.

Many pundits say Kada is a figurehead for a party that is really run by veteran backroom deal-maker Ichiro Ozawa.

Among its pledges, the party promises to:

—end nuclear power generation in 10 years.

—stop the consumption tax hike.

—offer special allowances to families with children.

The New Komeito is a party of lay Buddhists that enjoys a narrow but loyal support base. It advocates pacifist policies and social programs to help the vulnerable.

It formed a coalition government with the LDP between 1999 and 2009 and has worked with it in opposition.

The party has pledged to:

—phase out nuclear power “as soon as possible” by not approving plans to build new reactors.

—expand scholarships for high school and college students and freeze fees for pre-schools and nursery schools.

—get Japan out of deflation within two years, achieving nominal 3-4 percent growth.

—boost diplomacy to protect Japanese territory including islands in disputes with neighbouring nations.

—seeks to build a Free Trade Area of Asia-Pacific (FTAAP) through making free trade deals.

© 2012 AFP