Mikhail Gorbachev, Supply-sider
Jude Wanniski
April 3, 1989


At Polyconomics' February conference in Boca Raton, Fla., we heard from Gueorgui Markossov, counselor to the Soviet Embassy in Washington, on the political, economic and social forces at work in the Soviet Union. An economist by training, the 37-year-old Markossov made several illuminating comments that he elaborated on during the long weekend, in private discussions as well as in the public sessions. The theme he emphasized was that the reforms underway did not suddenly spring from the brow of Gorbachev, but were gathering force throughout the 1980s, especially in the Andropov years. While there would be trials and errors in cutting a new path for the USSR, the question of Gorbachev's survival was no longer a central one, he thought. The dynamic is independent of one man. A second theme was on the importance the government was placing on the March 26 national assembly elections as a milestone toward building democratic institutions. A third broad theme was related to his ready acknowledgement that Adam Smith and Karl Marx were both supply-side economic theorists, their differences centered on who should own the means of supply, the individual or the state. A delightful moment came when he described the cooperative movement underway and the debate in Moscow over how much they should be taxed. He observed that the official proposal of 60% was shouted down. "Who would work if taxed to that level?" he asked rhetorically, adding that the decision was made to permit the republics to decide that question individually. "If Estonia wants to be a tax haven, so be it."

I've spoken to Markossov since the elections and found him almost beside himself with excitement at the ferment they produced, astonished that even two-thirds of the Soviet citizens who work at the Embassy voted for Boris Yeltsin instead of the party candidate! My general feeling is that the pace of change in the Soviet Union and the East bloc will accelerate as a result of this Easter Sunday political earthquake, easily one of the most important days of the 20th Century.

1) We've already had reported over the weekend that Gorbachev is burying the "Brehznev Doctrine," foreswearing Soviet political interventions in Eastern Europe.

2) The Jim Baker deal with the Democratic Congress on Nicaragua gambles on the come that the Kremlin will be able to produce genuine free elections in Nicaragua next spring. (I told Markossov I would be first in line urging most-favored-nation trade treatment for the USSR if JBIII wins his bet; he cheerfully allowed that the USSR will urge all its allies to follow its example!)

3) Where I'd been expecting a convertible ruble in place by the mid-to-late 1990s, I can now see it developing within three years, coinciding with European integration.

We'd been reading about Gorby fever in West Germany prior to the 3-26 elections. Now, some of the most hard line anti-communists I know have "come over," shedding their fundamental skepticism and accepting Gorbachev as a genuine populist reformer the antithesis of Hitler, Stalin and Mao, each of whom represented the darkest of Malthusian anti-growth impulses. This shift of thinking will immediately be felt in the budget negotiations, with the White House, OMB's Darman, Pentagon's Cheney, being able to think defense cuts and DoD reforms, their hands further strengthened in Gramm-Rudman negotiations with Capitol Hill. The marvelous victory of Rep. Newt Gingrich (another of our illustrious guests at Boca Raton) as House minority whip is another piece of great news for the forces of change. Gingrich supports the JBIII gamble on Nicaragua --as opposed to Sen. Jesse Helms and other remaining Gorby skeptics such as Pat Buchanan, who still see him as a force of darkness. Gingrich is ready, as is former NavSec John Lehman, to cash in on budget outlays for manpower readiness, cutting active troop levels in favor of reserve strength. The Stealth bomber boondoggle is almost certainly doomed as well. But I continue to believe SDI is the wave of the future, and Reagan's pledge to share its expensive technology with the Soviets -- which once seemed ridiculous ~ now looks more credible.

My optimism of positive change in the Soviet Union has been overtaken by events again and again, becoming conventional wisdom and generating even rosier scenarios. The new pessimism is that Gorbachev's economic reforms will fail to produce results fast enough to prevent political reaction from the Old Guard. My sense is that the Easter Sunday elections will cut through much of the remaining resistance to institutional reform, with younger political players especially fearful of missing the bandwagon. On economic policy, the Kremlin's energies will be divided among those seeking outside capital infusions and those concentrating on internal, bootstrap reforms. To me, the most important questions will involve the pricing of agricultural leases and the decision-making structure on the commune/collectives.

In the cities, the tax rates on cooperatives remain important, but more important is the political dynamic unleashed by The Day That Shook the Empire. Eventually, changes in the Soviet Constitution have to be made to permit legislation to overrule the bureaucrats of the ministries, which will continue to resist reforms that promise more individual enterprise. So many doctors were forming private practices via the cooperative movement. For example, the state hospitals prevailed on the Health Minister to sharply circumscribe the freedom of the new health cooperatives. The Constitutional provision that forbids one citizen from hiring (exploiting) another, is one that now could be vulnerable to political change. The dodge now is to have "one-man cooperatives" hiring other "one-man cooperatives," a very unwieldly method of organizing capital and labor.

The Kremlin is not even thinking about rouble convertibility at the moment, believing it will require very difficult and complex maneuvers to prevent an internal rouble inflation. The transition will be much easier and quicker, I think, as the Soviets become more familiar with financial instruments keyed to the new joint ventures. As corporate equity and debt instruments are available for private purchase, via stock and bond markets, the roubles can come out of the mattresses to purchase future goods rather than bid for present goods in short supply. As I advised Markossov and the participants in Boca, I believe the greatest stock market advances between now and the end of the century will occur on the Moscow Stock Exchange, even though it has not yet been created.

As long as the western economies continue to expand, and there is little reason now to believe they will not, Gorbachev will have time to put together a state-of-the-art monetary and fiscal structure that suits the national culture. But we should no longer have to read in the press that the Russians, by nature, enjoy dictatorship and dislike democracy. And as long as Gorbachev encourages representative government, even the ethnic republics would find it more advantageous to remain within the empire than press for independence. After all, to leave the USSR now after all those years in the darkness should give them pause. If I were a Soviet dissident, this would be a time to stay and make hay while the sun shines.