Gottfried Haberler · 1993
This file is a single policy-economics chapter, first published in 1989, surveying the late-1980s world economy through three linked questions: US-centered global imbalance, exchange-rate instability, and the debt crisis of less developed countries. Haberler’s thesis is that these are not separate technical malfunctions but consequences of domestic policy failures—especially fiscal deficits, inflationary expectations, and politicized exchange-rate management—and that the remedy lies in credible non-inflationary policy, liberalization, and market-determined exchange rates.
The subtitle indicates three major problems confronting the world economy that I address in this chapter. The first is global imbalances, the persistent and large US budget and trade deficits (more precisely, current account deficits) and the equally persistent German and Japanese trade surpluses.
The chapter begins by placing current anxieties against the postwar record. Haberler does not deny recession risks, inflation danger, or economists’ disagreements, but he resists declinist interpretations. His historical move is to contrast the volatility of the 1970s and 1980s with the broader achievement of postwar liberalization.
It is no exaggeration to say that it has been nearly half a century of unprecedented growth and prosperity for the whole western world, developed and less developed countries alike.
From there he turns to the US budget and trade deficits. He rejects the “Ricardian equivalence” claim that deficits are harmless because rational savers fully anticipate future taxes. Expectations matter, but Haberler’s point is behavioral and institutional: public debt does not become neutral merely because theory imagines perfectly forward-looking households.
People just don’t think that way. Nobody knows what his future tax liabilities will be, let alone those of his children and grandchildren.
His policy recommendation is fiscal consolidation over several years, preferably through a gasoline tax that would also reduce pollution and traffic congestion. He distinguishes cyclical deficits from structural deficits and argues that the early-1980s deficits had short-run benefits—helping recovery, attracting capital, strengthening the dollar, and restraining prices—but became dangerous once they transformed the United States from creditor into debtor.
The exchange-rate sections form the chapter’s conceptual core. Haberler defends floating rates against nostalgia for Bretton Woods, arguing that fixed-but-adjustable regimes invite one-way speculation against central banks. Yet he does not romanticize floating as ideal: it is a second-best arrangement made necessary by divergent national policies. His main target is “managed” floating, where governments pretend to know equilibrium rates and unsettle markets with interventions, leaks, and communiqués.
The right policy for the four countries is to concentrate their efforts on the basic domestic objective – that is steady, non-inflationary growth – and leave exchange rates to be determined in free, competitive markets.
This does not mean that markets are infallible; rather, Haberler judges them more self-correcting than governments. Officials are slow to admit errors, while market participants who see overshooting can reverse positions. His appendix on the 1989 dollar surge reinforces the point: sterilized intervention changes central-bank portfolios but not money supplies, so it cannot reliably move exchange rates without risking inflation.
The debt-crisis discussion applies the same framework to Latin America and other debtor economies. Haberler treats the crisis less as a liquidity shortage than as a result of inflation, controls, inefficient state enterprises, and political mismanagement. Argentina exemplifies squandered potential; Chile, for him, shows the effects of liberalization, privatization, lower tariffs, and monetary restraint.
What is needed can best be described as a general liberalization of the economy, including the elimination of exchange controls and excessive import restrictions and the privatization of many public enterprises, which are now often grossly inefficient and over-staffed.
The work’s relevance lies in its disciplined liberal internationalism: external balance is not to be engineered mainly by exchange-rate bargains or debt rollovers, but by domestic fiscal credibility, monetary stability, open markets, and institutional reform. Haberler’s final synthesis is that global adjustment should begin with national policy coherence, not international fine-tuning.
My conclusion is again that the best method of dealing with global imbalances would be for the United States, Japan, Germany, and possibly other large industrial countries to conduct their monetary and fiscal policies so as to achieve basic domestic policy objectives – steady non-inflationary growth and high employment.
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