AmEmbassy APO AE 09213-1415 May 22, 1995 The Honorable Robert Rubin Secretary of the Treasury Department of the Treasury Washington, D.C. 20500 Dear Secretary Rubin: This is a seriously intended letter. During my career in the State Department, I was Senior Economist in the Office of International Monetary Affairs and worked closely with Treasury officials. I subsequently served as Economic Advisor to our OECD Mission in Paris, was Acting Director of the Office of European Regional Political/Economic Affairs, and Director of the Office of Economic Intelligence and Research. And I've replied to hundreds of citizens who've written the Secretary of State with their ideas for solving the world's problems. So I realize this will be delegated to one of your staff people. I also recognize that my comments are basically of a political dimension which few of your professional staff will be equipped to deal with or appropriately evaluate. I can thus only hope this letter will be bucked up to someone on your staff of political appointees, so the ideas will at least lodge in his/her brain and be put forward somewhere along the line in a policy paper which will find its way to your desk. Indeed, I put forward the idea on German debt repayment a few years ago to your predecessor James Baker when he was Secretary of the Treasury. And had the ironic experience of later meeting at an OECD do in Paris the chap who'd drafted the reply to my letter telling me that the idea was most difficult to implement since Germany was divided and it would be impossible to allocate responsibility for each part's responsibility for the debt.. The fellow who'd drafted the Secretary's reply was then a member of the US Mission and I was working as an OECD Consultant and we had a good chuckle about the principles of framing apparently responsive and always inoffensive replies to constituent letters while saying nothing of substance. I truly hope something more may come of this letter, given the startling changes in circumstances which have occurred in the meantime. My suggestion is that we unilaterally declare an end to the post WW-I debt moratorium with the Germans which both your Treasury people and my former State Department office colleagues still dutifully calculate and report to Congress year by year. The Germans are now running enormous surpluses in their balance of payments, and we are running enormous deficits. While it is generous on our part to let the Germans use their surpluses to rehabilitate their Ossie relatives and comfort their former Soviet enemies, I (and I'll bet millions of other Americans) have a hard time understanding why our rich German cousins can't begin to pay back their debt to us first, which with accumulated interest would slow down their economic advance a little (and that of the competitive EC monster that my former Harvard professor Gottfried Haberler warned us years ago the Community would inevitably become, but which none of us starry eyed Trans-Atlanticists would believe). This would give us the resources to take care of some of the pressing domestic social and infrastructure problems which we're having to finance by borrowing (from, guess who, the Japs and Germans). If we then want to turn around and use this money to rehabilitate the Russians, fine. This would be our decision. But as I see it, Germany is using what should be our money -- prior debts having logical seniority -- to gain moral and trade benefits with the Russians which should accrue to the US. While, as Jim Baker's clever surrogate pen said, "it would be impossible at this late date to allocate the proportion of the debt to be repaid by the East and West Germans governments", this is obviously no longer an issue. It's again one Germany with one government, one system of taxation, and one huge international debt which has been awaiting repayment for almost as long as the erstwhile communist governments of Eastern Europe have been wasting the resources of almost half the world. Significantly, the Germans have recently announced that they're going to start paying interest on WW-I bonds which have been in suspension for nearly seventy years. So they may be ready for an approach on WW-I war debt. We're finally getting a bit firmer with the Japanese about opening up their monopsonistic economic system. Though each time we reach some kind of agreement with a Japanese Prime Minister, Japan changes Ministers and we have to start all over again with the next one. Our delay in coming to grips with the Japs is thus more comprehensible -- if not acceptable. America has been used to dealing with monopoly and with governments where the promises of one administration are honored by the next, so it's taken us awhile to come to an understanding about the workings of monopsony, with which we're historically unfamiliar, and with convenient changes of government when foreign leadership can no longer stand up to our reasonable pressure. I also enclose a paper on The Theory of Second Best and US Trade Policy , drawn from my Harvard PhD dissertation written thirty-five years ago, which received plaudits from my examining committee. Indeed, the entire dissertation was subsequently published by Universities Press, with copies ordered by every OECD delegation in multiple copies for Mission and Home Office reading, though it seems to have fallen into oblivion in the United States, much as Professor Denison's notions about quality control were adopted abroad while being ignored in their country of origin. I earlier mailed reprints to the Chairman of the Senate Finance Committee and a dozen other selected committee members. When I sent it to the Economist magazine, it was denounced in an editorial, without being explicitly identified, as an example of the rising protectionist sentiment in the United States. But I believe the thinking it expresses is finally finding an echo in some members of Congress. I would hope that the Clinton Treasury and White House might read it carefully before dismissing it as "know nothing" trash. Richard Caves and Gottfried Haberler, who are certainly not "know nothings", considered it my contribution to the advancement of economic thinking and worthy of a Harvard PhD. And I've defended the concept, and persuaded not a few of my academic colleagues at George Washington, the U of Maryland, the University of Paris, and universities in Mexico and Central America where I've taught, that this is the explanation and answer to what we've been experiencing from Japan's manipulation of false Free Trade verities to our disadvantage. Many of the views expressed are repeated in the Beating Back Predatory Trade article by Alan Tonelson in the July 1994 Foreign Affairs -- perhaps giving my paper a bit more clout than it had standing alone. I'll be looking forward to what your proxy-pens have to say about a) my suggestion that we get the Germans, upon whose goodwill as an advance base towards the former-Warsaw Pact we are no longer dependent, and who've benefitted from sixty years of US patience and benevolence, to start repaying WW-I reparations plus accumulated interest on whatever terms can be negotiated; and b) my notion that the US and the world would actually be better off by our introducing a series of carefully calculated departures from theoretical Free Trade norms often not applicable in real world conditions (along the lines of the DISC and IET legislation of the '60s), to achieve a Second Best sub-optimum well above the third best situation we're currently experiencing. This isn't protectionism, it's common sense (and post post-Keynesian economic sense) for industrial survival in a world of increasing preferential trading blocs, predatory international pricing, and monopsonistic national purchasing/distribution cartels. Perhaps the President's decision to implement Super 401 provisions will have the desired effect. Sincerely, D. B. Timmins Professor of Finance & Economics (ret.)