America's Macroeconomic Future Is Bright

A major bank advises its clients on Friday that the dollar is due for a comeback, and soon, and on the following Wednesday recants. Economists repeatedly get their forecasts wrong, and use their year-end publications to explain their past errors while offering new short-term forecasts. Like my colleagues, I can’t attend a cocktail party without being asked: “Where are share prices headed?,” and “Will the value of my house continue to rise this year?” “Should I switch from dollars to gold?” Fortunately, my “I don’t know” is taken as a technique for keeping that valued information to myself, rather than for the honest confession of ignorance that it is.

But the question of the long-term outlook for the American and other economies does lend itself to economic analysis. And there is no better place to start the process of than with Bill Emmott’s outstanding new book, 20:21 Vision: The Lessons of the 20th Century for the 21st. Emmott, editor of The Economist, includes all the requisite “but ifs” that one would expect of a careful analyst. But there is no mistaking his conclusions about this century:

". . . The very long-term trends will again be positive and powerful: . . . democracy will spread further; . . . now-poor nations will develop and emerge as modern, richer, industrialized societies; . . . new technologies . . . will again transform work; . . . individual autonomy will develop further. . . ."

There’s more, but you get the picture. Key to all of this will be a “United States of America [that] is able to, and willing to, offer . . . leadership in the cause of world peace and security, and of unimpeded trade. . . .” For which there are several reasons. One is that its people accept the costs of what the great economist Joseph Schumpeter labeled “gales of creative destruction” in order to reap the benefits of changing technologies, corporate structures and flexible, relatively deregulated markets. This is what Emmott calls “America’s great peculiarity . . . an American advantage relative to other rich countries. . . .”

With change seen as an opportunity rather than a threat, government regulation to prevent change has less likelihood of being adopted in the U.S. than in other countries. In turn, the low incidence of regulation encourages entrepreneurs to find new and better ways of producing and marketing goods and services. “The United States is able to generate and, more importantly, to absorb new technologies more rapidly than other countries because U.S. firms face relatively modest regulatory barriers. This is an important lesson for other countries,” conclude Lisa Lynch and Stephen Nickell (professors at Tufts University and the London School of Economics, respectively) after a statistics-laden, technical analysis of international labor market and other data.

Another source of American vitality is its people’s willingness to tolerate inequality, because, as a recent National Bureau of Economic Research study of attitudes of 128,000 people in Europe and America found, “opportunities for mobility are (or are perceived to be) higher in the U.S. than in Europe.” It is a lot easier to tolerate a stay at the bottom of the income ladder when the route to the top is open. Ambition, not envy, becomes the dominant motivator.

Finally, because it is flexible and open to global competition, and because its central bank has learned some hard lessons during periodic oil shocks and the Vietnam war, the American economy is more inflation-resistant than ever, and therefore can sustain higher growth rates than in the past without reviving inflationary forces. As Harvard professor Gregory Mankiw has pointed out, “the success of monetary policy in the 1990s” contrasted with “its failures in previous decades” because monetary authorities learned to raise real interest rates at the first sign of inflation.

None of this is to suggest that the current gap between the American and other economies is foreordained to persist. For one thing, the very success of America in maintaining world peace and in opening markets will stimulate growth in other countries, perhaps enabling them to narrow the gap with the United States. For another, most scholars agree that America will lose ground unless it upgrades its educational system, which is now characterized by urban schools that turn out functional illiterates, graduated so that teachers can see the backs of them, rather than because they are prepared to play productive roles in the economy.

Education is only one policy area that will importantly determine the future course of the U.S. economy. American policy makers have learned enough about monetary and fiscal policy to be able to cope with—although not to solve completely—many of the problems that plagued the economy in the past. They have learned, too, that subsidizing and protecting industries is the route to reduced national wealth.

But that doesn’t necessarily mean that U.S. policymakers will apply the lessons of the twentieth century to the twenty-first, politics and human frailty being what they are. So we have farm subsidies and steel tariffs. But if these remain aberrations, gloomy forecasts of the outlook for the U.S. economy should prove misplaced, better reserved for countries that seek solace in protectionism, rigid control of hiring, firing and wages, and high taxes.

For which there is no better proof than last week’s moan from Romano Prodi, president of the European Commission. It seems the European Union is falling ever-further behind the U.S. in the competitiveness race. Per capita productivity of the employed workforce in the EU fell from 86 percent of the U.S. level in 1999 to 83 percent last year. Count the zero productivity of the massive numbers of unemployed and things are even worse for the EU. And unlikely to get better, as resistance to labor market reform remains a potent force, Europe continues to devote fewer resources to research than does the U.S., and EU taxes remain high while in the U.S. the debate is not over whether, but by how much, to reduce them. All of this makes one wonder why recent reports of a “soft spot” in the U.S. economy get so much attention. Keynes was wrong: it’s the long-run that matters.

This article appeared in London’s Sunday Times on January 19, 2003, and is reprinted with permission.