International finance is a more amusing subject than you might think. For connoisseurs, one of the better moments of the annual International Monetary Fund meetings was in a preparatory session a few days ago. The subject was the huge American budget deficit and its effects abroad. The U.S. secretary of the Treasury, Donald T. Regan, was defending the size of the deficit with the argument that any tax increase to reduce it might kill the economy's recovery from the recession. The rebuttal came from Jacques Delors, the finance minister in France's Socialist government, who vigorously reproached Mr. Regan for his excessive reliance on Keynesian policy.
The particularly comic thing about it is that Mr. Delors is quite right. There's been a remarkable turnaround at the Treasury. One of the horses on which the Regan administration rode to Washington three years ago was named Anti-Keynes. But Mr. Regan seems subsequently to have fallen off the horse. Or perhaps he traded it for something a little more sporty.
Originally the administration was full of grave warnings to the country that it had followed Lord Keynes much too far, and had depended too long on his prescriptions of deficit spending to keep the economy growing. Those deficits were dangerously inflationary, as the Reagan administration correctly argued in its earlier, anti-Keynesian phase. Too much Keynes had skewed the economy away from savings and investment, it said. What the country needed was balanced budgets, thrift and more business investment.
That's all past tense now. What actually arrived were a grossly overdone tax cut, rising deficits with continued high interest rates, and the recession. Now the administration--in its post-anti-Keynesian phase--is anxiously counting on those deficits to pump up consumer spending and to keep the recovery going at least through the election next year.
But beyond all the comedy, there is occasionally a serious side as well to international finance. The Europeans and the Japanese, not to mention the poor countries, are deeply uneasy about the high interest rates that result from the American deficits. Because American interest rates are high, the European and Japanese governments have to keep their rates much higher than they wish in order to keep the United States from sucking capital out of their economies even faster. Because their interest rates are abnormally high, they have to run very large fiscal deficits to keep from sliding back into recession.
You don't have to be a Socialist to think that's a formula for trouble.