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July/ August 1997
Vol 76, Number 4 << Previous: May/June 1997 | Next: Sept/Oct 1997 >> FIND FOREIGN AFFAIRS ON A NEWSSTAND NEAR YOU
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The Case for Privatization
Martin Feldstein
By 2030, Social Security payroll tax rates will rise to 19 percent - more than 45 percent including Medicare and Medicaid. In Europe, which faces similar challenges, the burden of entitlement expenses is already so great as to slow economic growth. The solution is to phase out Social Security and other pay-as-you-go programs and replace them with a mandate for all to put away savings in a mix of stocks and bonds. Under a privatized system, the same benefits would require contributions equal to just two percent of U.S. payroll. Not only would the elderly be safe from poverty, but for the first time people of low and moderate means would accumulate significant personal savings.
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Stick with Public Pensions
Richard C. Leone
Although privatization zealots backed by Wall Street have called for replacing Social Security with mandatory investment in stocks and bonds, their promised high rates of return do not accord with experience. Any form of private investment is much riskier than a government program, and in the end can be more expensive if the government must bail it out. For at least a generation, retirement taxes would rise, funneling money to private investors. With small adjustments, the current pay-as-you-go system can continue its historic success.
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Transforming the Military
William E. Odom
Secretary Cohen's defense review is out, but the flaws in the Pentagon's military planning are still glaring. Haiti, Bosnia, NATO expansion, stability in Korea, keeping Iraq in check-all these are primarily army and air force missions. Yet the army has been reduced by about 40 percent, while the navy has been cut back far less and the marines hardly at all. Advances in technology make the marines' expeditionary role and the navy's aircraft carriers obsolete. Defense doesn't need more money; it needs to reallocate resources. As it stands, the United States is paying more for a military that can do less.
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The End of the Business Cycle?
Steven Weber
The waves of the business cycle are becoming ripples. The recent American combination of minimal inflation and very low unemployment may not be an aberration, but the beginning of a new worldwide trend. Smarter government policy, globalization, changes in employment, advances in information technology, and emerging markets all cushion shocks and dampen the familiar boom and bust. The consequences for world politics and prosperity will be profound.
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The Dollar and the Euro
C. Fred Bergsten
With the creation of a single European currency, the dollar will have its first real competitor since it surpassed the pound sterling as the globe's dominant currency. As much as $1 trillion of international investment may shift from dollars to euros. The political impact of the euro will be just as great. Europe could try to export its high unemployment by undervaluing the euro's initial exchange rate. Protectionist battles could break out. The euro's arrival need not cause instability in world markets, but it will probably cause volatility. A smooth transition to a stable dollar and euro system will require a quantum leap in transatlantic cooperation.
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Making Foreign Aid Work
Carol Graham and Michael O'Hanlon
Decades ago, donors saw aid as a transfer of resources from rich to poor countries. Today they see it more as a means of improving recipient countries - use of domestic resources. And though aid has had its successes in humanitarian relief and family planning, its record is mixed when it comes to promoting economic growth. Many nations in sub-Saharan Africa are poorer than when they began receiving aid. The solution is not to end foreign aid, but for donors to know when to say when, cutting off countries that fail to adopt sound economic policies and rewarding those that do.
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Why North Korea Will Muddle Through
Marcus Noland
Things may look bad, but North Korea can stagger on for a long time before it collapses. The famine there, limited information seems to reveal, is due not to shortages of food but to political decisions in Pyongyang. But unification would be so costly for South Korea - about $1 trillion over 10-25 years - and a mass southward exodus so debilitating that the South will instead try to prop up the North. China will provide food, and the United States fuel, while the North muddles through with a form of apparatchik capitalism similar to Romania's, in which officials channel resources to favored groups.
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Indonesia After Suharto
Adam Schwarz
Into his fourth decade in power, President Suharto has guided an impoverished, strife-ridden nation to rising prosperity and outward stability, at the cost of abridged political and civil liberties, gutted democratic institutions, and flourishing corruption. Now economic disparities, ethnic and religious differences, and the frustrated aspirations of a new generation are triggering outbreaks of violence across the islands, and what passes for politics in Indonesia is unable to cope. The unsettled succession to Suharto, 76, is, frankly, scary.
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