12.19.2012 1

Implement the Balcerowicz Plan

Photo Credit: balcerowicz.pl.

By Bill Wilson — From 1989 through 1992, I had the good fortune of visiting Poland to see firsthand the rapid economic transformation the country was going through in the post-Soviet era.

Just a few hundred yards away from the Parliament, near the corner of Wiejska and Boleslawa Prusa, one could observe free market forces asserting themselves over time. The first year, the economy had completely collapsed amid crushing inflation.

Nonetheless, on that street corner I found a prototypical Polish butcher with little more than a tree stump and a cleaver, cutting the meat and selling it from the back of a dirty truck, perhaps for the first time in his life. In the Soviet days, this man might have found himself being shipped to a gulag in Siberia, but now, he was a small businessman and free to engage in commerce without fear of penalty.

This was the beginning of free enterprise in Poland. The man was happy, of course, as human nature was once again reasserting itself — that innate desire to provide for oneself and one’s family without any need for direction from a central authority.

Within three years, the tree stump had been converted into a full-range butcher shop, funded by French investors, selling every type of meat imaginable. The speed of this transformation was astounding. Each subsequent year I visited, it was akin to observing a time series of photographs detailing the progress that was being made economically in the former Soviet bloc.

It has been about twenty years since I last visited Warsaw. I have no way of knowing if the butcher shop is still there today, but what I saw was just a microcosm of what was taking place nationally.

In fact, there was a very good reason for the rapid economic miracle that took place in Poland following the fall of the Soviet Union.

Leszek Balcerowicz was that reason.

Throughout his term as deputy prime minister and finance minister from 1989 to 1991, Balcerowicz rapidly administered a wide ranging economic reform package that transformed Poland almost overnight from a communist dystopia into a relatively free market economy.

In the years that followed, Poland economically outperformed other former Soviet satellites and even Russia with average 6.6 percent annual growth. Inflation was crushed.

Today, Poland has weathered the financial crisis and even the meltdown of the Eurozone without falling into recession.

Under his plan, Balcerowicz allowed the Polish zloty to float freely on currency markets. State-owned companies were dissolved — bringing an end to Soviet-style “too big to fail”. Price controls and subsidies were abolished. The Polish central bank was prohibited from monetizing government debt. State spending was cut substantially, and more than 1 million government workers were laid off. Arbitrary taxes were abolished in favor of more uniform laws.

In 1995, after his term was over, Poland expanded on the Balcerowicz reforms by reissuing the zloty via a 10,000 to 1 redenomination. This reduced the money supply drastically.

It is striking how these policies contrast so sharply with how the U.S. and other advanced economies have responded to the financial crisis in 2008. They are the exact opposite of what we have done here.

Today, spending increases every year, the debt increases more than 8 percent annually while the central bank prints money to finance it. Fannie Mae, Freddie Mac, and Sallie Mae — comprising the mortgage and higher education lending industries — have all been nationalized.

Too big to fail was institutionalized, first via 2008 and 2009’s ad-hoc bailouts from TARP and the Federal Reserve, and then through the Dodd-Frank legislation by creating permanent bailout authority for financial institutions.

The Fed under Ben Bernanke has drastically increased its balance sheet by $2 trillion since the crisis began in Aug. 2007, and now is promising an additional $1 trillion of quantitative easing every year perhaps for the rest of our lifetimes.

Why do two men, Bernanke and Balcerowicz look at a very similar problem — i.e. a national insolvency crisis — and come to such diametrically opposed conclusions about how to solve them?

I would contend that Balcerowicz is a patriot who was looking out for the Polish people foremost, putting the national interest first. Yes, the spending cuts and other reforms were painful at first, but they set a stable foundation and by 1992, robust economic growth had been restored.

In contrast, Bernanke has put the interests of financial institutions and their solvency first, ahead of the interests of the people, which are not always the same thing. This was the protection of the investor class, and banks, who were covered by government favors, meanwhile, nationwide more than 8 million people lost their jobs.

We can compare the results of both policies with hindsight. The fact is, even after a fantastic collapse of an entire society, a national bankruptcy where even the government had fallen, Poland recovered in V-shaped fashion. Former government workers eventually found jobs in the newly created private sector.

That is not something we can claim here, where the economy is only growing at about a 2 percent rate this year so far and 23 million people cannot find full-time work, with another 5 million having given up.

The bailouts are prolonging the process of deleveraging (i.e. debt repayment and default) by financial institutions. “The longer you practice these sorts of policies, the more difficult it is to exit it. Japan is trapped,” Balcerowicz observed in a recent interview with Matthew Kaminski in the Wall Street Journal, noting that they forestall necessary fiscal reforms and balance sheet repair in both the governmental and private sectors.

As a result, ever-greater “stimulus” from the Fed is a producing less and less economic growth, proving Balcerowicz’s approach to be the only rational course.

While the attention of our media and national politicians remains fixed on the small conversations between House Speaker John Boehner and the White House, perhaps our nation should be looking at the bigger approach that Poland took when faced with a far more serious fiscal cataclysm. Failure to do so now may make it impossible to achieve in the future, consigning our nation to the never-ending economic stall pattern that Japan finds itself in.

Bill Wilson is the President of Americans for Limited Government.

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