ENDING THE MARSHALL PLAN:

Teaching Values (Clay Risen, 12.01.04, New Republic)

It's a scary time when economists wax nostalgic for the Reagan administration, but that's exactly what's going on today. Reagan, though no less an advocate of free markets than Bush, recognized the need for coordinated intervention when, during the mid-1980s, the dollar rose too high against European currencies. The pricey dollar was making U.S. exports exorbitantly expensive, leading both the White House and Europe to conclude that without immediate action Congress would follow through on protectionist threats. So in 1985 Treasury Secretary James Baker and Fed Chair Paul Volcker sat down at the Plaza Hotel in New York with European finance ministers and hashed out a deal, later known as the Plaza Accord, to flood the market with dollars. The market got the message, and over the next two years the greenback fell from more than 3 deutschmarks to 1.85.

Contrast that with Treasury Secretary John Snow's recent European tour. Given the skyrocketing current-accounts deficit and the weakening dollar, Snow was under pressure to propose some sort of coordinated response (a falling dollar hurts European exports to the United States--exports that are a key component of the continent's already-fragile economy). But on the contrary, Snow said that coordinated intervention would fail and that the administration would not intervene to halt the dollar's fall. "We believe in open, competitive currency markets," he told a London audience. Rather than acting on the dollar, he said, the administration would commit itself to fiscal discipline and cut the budget while enacting Social Security and tax reforms; meanwhile he called on European nations to strengthen "their investment environment, their level of investment, and their economic growth performance" in order to bolster domestic demand.

In other words, you do your thing, we'll do ours, we'll all leave it to the market, and let the chips fall where they may.

Pardon our confusion, but Ronald Reagan intervened with our then client states to force them to help our economy--at a time when Europe still mattered somewhat, since our war was with a continental European power. Now, George Bush--during a war where the Europeans have effectively sided with the enemy--is unilaterally forcing them to change their economic policies or accept the consequences. Other than the fact that Mr. Bush is our first post-Atlanticist president, aren't there more similarities than differences between him and Ronald Reagan here--using the Europeans to serve American ends?

Posted by Orrin Judd at December 1, 2004 2:56 PM