Two Views of America's Economy

Spend a week in Britain, as I have, and you can understand why the U.S. and the U.K. are separated by a lot more than a common language. It just isn’t easy to understand what is going on in America from a distance of several thousand miles, and without day-to-day immersion in its political gossip and inside financial chit-chat.

Start with trade. President Bush’s decision to raise tariffs on steel and to increase subsidies to farmers are seen in Europe as an abandonment of his goal of further liberalizing world markets. But talk to administration officials and you get a different picture—take one step backwards to allow two steps forward.

And it worked. By pandering to a few special interests, most notably steel and textiles, Bush has finally gotten the House of Representatives to renew his authority to make trade deals. So we are likely headed towards a day when trade will be freer than it would be if the president had refused to cede some ground to politically powerful American protectionists.

Agriculture is another case of what you see is not quite what you get. Desperate to regain control of the Senate, and with several important races taking place in farm states, the one-step-backwards-two-steps-forward rule was applied. Cave in to farmers’ immediate demands, and increase the chances of controlling the Senate so that the president’s domestic program can be pushed successfully.

Meanwhile, pursue a longer run policy of ending all farm subsidies. Since subsidies to European farmers far exceed even the newly enhanced payments to American farmers, elimination of all such programs would work to the relative advantage of America’s toilers on the soil. Which is why the president has directed U.S. Trade Representative Robert Zoellick to join Australia in trying to overcome European objections to free trade in agricultural products.

The massive U.S. economy, too, is difficult for the casual, and especially the foreign, observer to understand. He sees wildly fluctuating share prices, American corporate moguls in handcuffs, restated earnings reports, falling consumer confidence, a sinking dollar, $5 trillion in paper wealth wiped out since early in the year, and a second quarter GDP annual growth rate of only 1.1 percent, well below expectations. All of which seems to bring joy to large parts of the European press and to leftish politicians and assorted academics who can barely suppress their glee at the strains under which a few corporate crooks have put American capitalism. After all, they have long feared that the American model will eventually prove more attractive to the European public than the high-tax, high-unemployment, regulatory model favored by continental European elites. Throw in their hope that America is so weakened by its economic problems that it will be unable to move against Saddam, and their view of the American president as an uncultured unilateralist, and you have a prescription for misunderstanding the American economic scene.

These critics cum gloaters are failing to notice the less obvious developments that really matter, the first of which is the speed with which the American system produced antitoxins to neutralize the effects of corporate malfeasance. Markets punished companies that had misled the public about earnings, and the government supplemented that punishment with tougher enforcement and new legislation. By mid August, most major companies will have filed with the Securities & Exchange Commission revised statements of earnings, sworn to by CEOs who would find even open prisons an interference with their lifestyles. That should remove most of the uncertainty about the accuracy of earnings figures, and give investors confidence that what they see is what they get.

The second under-attended-to factor is the underlying strength of the economy. Low interest rates continue to add strength to a housing market in which prices are 7.4 percent up on last year’s level. Auto sales continue to surprise on the upside. Inflation remains tame. The weakening dollar is making American firms more competitive in overseas markets closed to them for some years. Productivity improves steadily as America continues to spend 40 percent more on research and development than does the EU. Real incomes are rising and unemployment is low, keeping consumers’ cash flow in a lot better shape than their balance sheets.

This is not to say there are no problems. It will be a while before the lower dollar begins to correct America’s burgeoning trade deficit, during which time there is a danger that a massive outflow of foreign capital will turn a gradual dollar decline into a rout. There is a risk that investors’ withdrawals from mutual funds will accelerate, forcing share prices sharply lower. Consumers, their confidence already at its lowest level since February, and the growth in their spending down to a mere 1.9 percent in the second quarter (from 3.1 percent in the first), may become so depressed when they receive their quarterly pension-plan statements in October that they flee the shops, and withdraw from the housing market in a demonstration that the wealth effect works as much havoc on the down side as the euphoria it creates when wealth was rising. Skittish banks are reluctant to make funds available to prospective business borrowers.

Most of all, there may be a war. Again, we have to look beyond what seems to be, to find what is. Reports of Democratic insistence that Bush reveal his plans so that a genuine national debate might be held are misleading. The debate is over. Americans understand the threat Iraq poses and want the president to do what is necessary to end that threat. And leading Democrats have already signed on to the regime-change policy. Only the when and how remain to be determined.

So dig beneath the headlines and you see an America that is reaffirming its commitment to freer trade, including in agricultural products; an economy that has coped quickly with corporate scandal and shows signs of significant underlying strength; some significant uncertainties as consumers adjust to recent declines in their wealth, not by spending less, but by increasing their spending at a slower rate; and a nation preparing for war.

This article appeared in London’s Sunday Times on August 4, 2002, and is reprinted with permission.