Or, perhaps the problem was not our inability to handle Lehman properly, but our failure for two decades to address the underlying structural issues in the world and U.S. economy.

Prof Rogoff predicts that, "Within a few years, western governments will have to sharply raise taxes, inflate, partially default, or some combination of all three." Here's a link to a one-question poll where readers can express their preference for one or more of the above courses of action, thanks: http://polls.linkedin.com/p/52254/awbwb

"Within a few years, western governments will have to sharply raise taxes, inflate, partially default, or some combination of all three."

Or cut spending!!!! Why is this NEVER an option????

Corrections to fiscal imbalances do not have to be dramatic, and can actually work to solve several problems at once.

For example, we all hear about earmarks. But, there is a tax corollary--targeted tax cuts for specific corporate taxpayers or narrow industries. I know. I used to work in DC, and friends of mine are lobbyists who make a killing on targeted tax cuts (call them "Tax Earmarks") every session. These tax earmarks are a gift that keeps on giving...not just in one year, but indefinitely...so let's start calling out Tax Earmarks, identifying them and require they be treated like other earmarks.

Second, we should look at how we treat itemized deductions, and not just look at tax rates. Do you think it is good policy to have an unlimited tax deduction for interest payments to support a house. I want to buy a $3 million dollar house--interest is deducted--we borrow from China to finance it, in effect. How about a cap on interest deduction on housing to be phased in over time. You can start high...let's say you can deduct up to $60,000 in interest--but, do we have to continue supporting very high interest deductions on primary and vacation residences? And, this money is borrowed money too! And, many of those who borrow to buy these extra properties are doing so to lower their marginal rate....which suggests we could bargain to lower marginal rates in exchange for capping some deductions, particularly those that result in leveraged borrowing. You think government debt is high, you should look at the growth of personal debt as a percentage of GDP. And, since we are not net savers, we are borrowing it from someone.

A New Perspective on the Global Economic Crisis III: The Way Forward

I. Introduction

The American economy has reached the cross-roads. Unfortunately, the majority opinion in the community of economists is headed in a different direction from the policies that I think would be prudent in the long-term. This majority opinion holds that the Federal Reserve's intervention in the financial system during the last one year has managed to prevent a return of the Great Depression, but that the economic recovery that lies ahead would be slow and uncertain. There is definitely a sense of being at the cross-roads. The drastic fall in industrial activity during the last three quarters seems to have been contained. The regular recurrence of financial panics that took the Dow Jones Industrial Average from 14000 down to 6500 between October 2007 and March 2009 seems to have been halted. For the second quarter of 2009, companies have reported earnings that have far exceeded expectations, especially the financial companies have done so.

On the other hand, the pressing question among economists at this time is whether the current recovery would be robust and sustained. To be fair, the dangers that the American economy would fall back in to a few more quarters of negative growth, as happened in the 1980-82 recession, are indeed real. The global economy seems to be in a slightly better shape, but since it is heavily dependent on the American consumer, its recovery at this point is suspect as well. However, this does not mean that America's long-term economic policy should continue to be dictated by the Federal Reserve, or by the Treasury, or even by the cabal of economists that currently exerts great influence on the American Presidency. In this article, I provide an alternate view for the long-term economic policy that governments around the world ought to follow.

II. Toning down American triumphalism in exchange for long-term economic growth

The fundamental theme in this article is that by 'toning down' the Cold War remnant of American triumphalism to the appropriate level, America could sail through the current economic crisis much more smoothly than economists expect now. This 'toning down' would involve better sensitivity to the concerns of the rest of the world. In particular, facilitating the high growth rates of the emerging market economies, instead of attempting to block them through shrill cries about global imbalances, should be one major goal. One other major goal is for America to bring serious commitment to eradicating global poverty. In return, America could avail of significant economic opportunities as the banker, the lawyer, the scientist and the doctor of the world. In my current estimates, which are admittedly crude, these economic opportunities could ensure between 3/4 and 1 1/2 percent of real growth in annual GDP for many years to come. With a conservative estimate for an additional long-term real growth rate of 1 1/4 to 2 percent that the economy could generate domestically, we see that America could achieve significantly higher growth rates than the "new normal" that is being touted in the media these days.

These methods that I propose in this article, for estimating the increased long-term economic opportunities that would arise by toning down American truimphalism, apply mainly for firms that provide services of the following nature: financial, legal, accounting, information technology, digital networks, computing devices, print and online media, sports, health-care, alternative energy and consulting. Hence, the methods introduced here would be supplementary to the durability approach that I had introduced in my recent article, "A New Perspective on the Global Economic Crisis II: Fear of Reverse-colonization Did It". Please recall that my durability approach enables estimation of growth in those industries whose operations can be explained by traditional economic theory, for example, manufacturing, agriculture, food processing, clothing, retail & distribution, construction and transportation.

We note here that, at this early stage, we do not provide estimates for economic growth that would arise from the increases in international trade that would result when American triumphalism is toned down. We only quantify these increases in international trade to the extent that they would confirm the estimate of 1 1/4 to 2 percent of real growth rate for the domestic economy that was cited above. In fact, in this article, our focus is mainly on discussing how the toning down of American triumphalism would bring benefits to America from the fact that the US dollar is the predominant global reserve currency. The equity premium for American companies taking more risks globally, the transaction charges for providing market making facilities in global markets, and the provisions of liquidity for the currency of international trade are already major drivers of economic growth for America. In addition, corporate law and company-based organization are two Western institutions that could provide indispensible services in a rapidly globalizing world.

With America managing robust long-term growth, the prospects for the emerging market economies to regain their rapid-growth path would be re-ascertained, in addition to the prospects that they would achieve rapid-growth on their own even if the world were to be de-coupled. As a result, robust growth, instead of "new normal" growth, for the global economy seems achievable as well. The main difference in my approach is that I have tried to quantify the enormous economic opportunities that have newly opened up due to the world-wide popularity of the Obama Presidency. Whereas the "new normal" folks are stuck with the Bush era mentality of American isolationism and military adventurism.

Even worse than the "new normal" folks are the Great Depression maniacs, who are stuck in a colonial era mentality. It was a standard trick of the colonial empire, in the time of Keynes and earlier, that before an economic downturn arrived, the policy makers at the center of the empire would constantly proclaim an exaggerated sense of calamity and crisis in the media. In this way, they would facilitate the printing of loads and loads of the colonial reserve currency. The colonial empire thus retained the great advantage of exercising 'first use' on the newly printed money, much before inflation or devaluation could catch up with the flood of liquidity. Moreover, when the money finally reached the colonies, it siphoned off economic growth from the colonies, and channelled it to the center of the empire. The gullible political leaders of the colonies, who had invariably received their education at the empire's leading universities, were not smart enough to figure out what was going on. Even as late as 1997, the East Asians did not figure it out.

It is unfortunate for Western intelligentsia, that at this current time, the Chinese have understood this game all too well. When the Federal Reserve printed several trillions of new money last year, the Chinese had quickly released their own currency into their own economy, in anticipation that over the next few years, a significant part of these several trillions dollars that the Fed has printed would flow into China. As a result, the weak dollar policy followed by Professor Ben Bernanke, the Chairman of the Federal Reserve, under the guise of the savings glut theory, has been a colossal failure. It is highly unlikely that the Federal Reserve led by a re-appointed Professor Bernanke would follow a policy of a stable dollar. For this reason, it is highly unlikely that the process of 'toning down' American triumphalism in exchange for long-term growth opportunities that are robust and stable, would be facilitated by the re-appointment of Professor Bernanke.

As feared in many quarters, it would be a grave mistake to appoint Professor Lawrence Summers as the next Chairman of the Federal Reserve. I would definitely agree that he has done a commendable job of stewarding the $787-billion American Recovery and Re-investment Act of 2009, right from its origins. However, in my opinion, his understanding of economic matters is not deep enough that he would be able to shrug off the strong sense of American triumphalism that he emanates in all his appearances at international fora, for example, at the annual Davos meetings. I hope that the fact that in contrast, Professor Joseph Stiglitz is hugely popular in foreign countries would help American economists understand that in the international arena, it would be very difficult in the future to pass off American triumphalism as a substitute for serious scholarship.

I would also recommend strongly that Professor Summers should not continue as the Director of the National Economic Council, since this position implies a near-daily access to President Barack Obama in an advisory and tutorial role on economic matters. In fact, I would support replacing the current Treasury Secretary Timothy Geithner with Professor Summers, in view of the Treasury Department's appalling performance in devising a program like the Public Private Investment Program (PPIP). I would also recommend replacing the budget director, Professor Peter Orszag and senior economic advisor Professor Austan Goolsbee. They have taken too long to retire the $260-billion of unused money from the TARP funds, so that the estimate for the budget deficit could be revised downward. Please recall that I had strongly advocated against enacting this $700-billion TARP in the first place. This would all have been far simpler, if instead, my price adjustment mechanism was adopted last September.

The third candidate, that is discussed in the media, for the position of the Chairman of the Federal Reserve Board is Professor Janet Yellen. I should say that I have not studied enough of her published work in economics to be able to make up my mind about the suitability of Professor Yellen for this position. However, I do have two strong candidates whose appointment as the next Federal Reserve Chairman, I would support strongly. My first choice is Professor Robert Mundell, whose appointment would come with his deep understanding of international currency systems. If he is not available, then I would support the appointment of Professor Edward Prescott. Professor Prescott has done ground-breaking research on the theory of business cycles, and he has been a senior advisor to the Federal Reserve Bank of Minneapolis since 2003. I would also comment here that the appointment of either Professor Mundell or Professor Prescott would demonstrate that the Obama administration is committed to supporting the public service of economists purely on the basis of their professional merit, and not on any considerations of political ideology.

III. Kudos to Professor Richard Cooper for anticipating some of my ideas, but our views are essentially different

In the last week, it has come to my attention that Professor Richard Cooper of Harvard University had already been writing about some of the same ideas that I have proposed recently. In particular, the radical idea I had proposed in my June 2009 article, "A New Perspective on the Global Economic Crisis", that global imbalances should continue was already proposed by Professor Cooper in his article "Living with Global Imbalances: A Contrarian View". His article was published way back in November 2005, and is available on his website. Moreover, Professor Cooper has also written an interesting article, "The Asian Crisis: Causes and Consequences" in 1999. I would definitely commend Professor Cooper for his early insights into the nature of global imbalances. Having said that, I would like to explain how his views are essentially different from mine.

Firstly, Professor Cooper believes that the Anglo-Saxon model of capitalism is what enables America to take relatively more risk in global economic ventures, in contrast, for example to the Asians, who tend to be risk-averse and save more. Secondly, Professor Cooper writes that the rest of the world sends huge amounts of its savings to America because of the unparalleled depth and liquidity provided by the American financial system. In fact, in his November 2005 article cited above, Professor Cooper says that the sophistication of the financial products available from America could enable continued imbalances in the US current account deficit. By sophistication is meant, of course, the theoretical advancements in risk managament and portfolio theory that have been obtained, using mathematical foundations, during the second half of the 20th century, and the rapid implementation of these theories on computer-based trading systems which are heavily inter-connected through high-speed networks. Mathematical sophistication is the only type of sophistication that America operates on, at present, in its economic interactions with the rest of the world because of the 20th century's mathematization of every aspect of economic theory.

In contrast to Professor Cooper's perspective, in my view, the Anglo-Saxon model of capitalism is no longer adequate for studying drivers of global economic growth, especially after the financial crisis of 2008. Instead, I have elaborated on a new framework provided by a confluence of the Roman law and jurisprudence, and other ancient systems of law, in my recent article, "A Twist in the Tale". Moreover, the sophistication provided by mathematical theories and high-speed computational infrastructure would not be sufficient to account for the huge profits that the American financial system raked up before the current economic crisis. Asians could easily replicate this type of sophistication. What the Asians do not have is the long tradition of Roman law and jurisprudence that provides the legal foundation for modern company-based organizations. This legal sophistication is what enables Western institutions to participate in economic activities with high intensity and speed.

In fact, the emergence of highly successful Asian diaspora communities in the advanced nations demonstrates that, at the level of individuals and families, Asians are quite adept at taking large risks and putting in disciplined efforts to gain huge long-term rewards. In the second half of the 20th century, many millions of Asians have travelled half-way around the world, and started their lives from scratch in foreign countries, to obtain huge increases in their lifestyles and educational opportunities for their children. It is at the level of the company organization that Western countries continue to hold the edge in the creation of economic wealth. Professor Cooper is definitely knawing at these issues in his writings. To wit, he is perhaps unique among Western economists, to propose that after taking the corporate savings of America into account, Americans are saving enough for their long-term future. However, Professor Cooper's methods are mostly restricted to econometrics, whereas, as I have explained above, I would like to employ a general framework of law and jurisprudence, applied specifically to company organization, to study the comparative advantages that the advanced nations have in the creation of economic wealth.

Further, in my opinion, a large part of the willingness of American companies to take more risk globally can be attributed to the fact that the US dollar has been the predominant global reserve currency ever since the Second World War. The worldwide supply of dollars is controlled by the Federal Reserve bank of America which is constitutionally mandated to strive for price stability and employment only for America. This provides an extra safe-guard for American companies in risk-taking ventures around the world. Here is where a significant divergence appears between Professor Cooper's perspective and mine. Professor Cooper, like nearly every other Western economist, has identified the root causes of the East Asian crisis of 1997-98 to rest within Asia itself. Professor Joseph Stiglitz is the rare exception among Western economists, who went to great lengths to fault the International Monetary Fund (IMF) in bailing out American banks first from the East Asian crisis. However, my perspective goes much further:

The East Asian crisis was a result of cheap money from the advanced countries chasing high growth in foreign lands. The profits from that high growth accumulates over a period of four or five years. When it is time for the investors from the advanced countries to look elsewhere for growth opportunities, then lo and behold, a much larger amount of funds than those that went in have to come back home to the advanced countries, in view of the rapid accumulation of profits. So, unless the foreign country has already accumulated a large enough reserve of international currencies like dollars, yens or euros, there would inevitably be a currency crisis. In fact, the East Asian countries, through an export-led boom stretching to 25 year or more, had indeed, accumulated large reserves beforehand. But they proved to be insufficient when a huge inflow of funds took place during 1992-97 as a result of the Federal Reserve's lax monetary policy. When this money accumulated profits, many more dollars had to go back home in 1997, which resulted in the crisis. The Chinese have understood this lesson all too well, and that is why they are waiting this time around with a foreign currency reserve worth of 2 trillion dollars. The East Asian crisis, is in fact, a well-worn trick from the exploitation of the colonial era, as explained in the previous section.

There is nothing wrong in one country trying to obtain mutually beneficial economic growth with foreign countries. The problem arises when that one country engineers a crisis in a part of the world that has long been growing healthily, purely through currency manipulations, and a whole generation of Western economists write article after article that cover up the root cause. This is why I propose a wider legal framework which would enable America to finance the rapid growth of the emerging market economies, and obtain as a reward, economic growth of its own, all done in a transparent and stable manner. For this purpose, it is necessary not to worry about global imbalances, but instead to guarantee the stability of the global reserve currency. I might add here that there is a certain unnecessarily destructive aspect to Western economic theory that would not sit well with the emerging market economies. What they are looking for is constructive approaches to shared economic growth. By toning down American triumphalism, America can avail these shared economic opportunities from the emerging market economies for a long time to come. To note, it is a common misconception that destruction is the only route to innovation.