May 16, 2005
by Irwin Stelzer
Don't be misled by the collapse of GM and Ford's credit ratings and market shares, or the impending bankruptcy of Delta Airlines, or America's trade and budget deficits. Or even by the turmoil in America's financial markets, so worrying that Timothy Geithner, president of the New York Federal Reserve Bank, felt it necessary to assure investors, "The U.S. financial system seems less vulnerable to financial specific shocks."
Of course, as reassurances go, this one was more than a little diluted by Geithner's accompanying warning, "Changes in the structure of the financial system and an increase in product complexity could make a crisis more difficult to manage and perhaps more damaging." Now there's something for Fed chairman Alan Greenspan's successor to think about.
So those who want to worry about the American economy have enough to keep them awake at night. But take a longer-run view of the nation's economic prospects, and tossing and turning will give way to a George W. Bush-style solid 10 hours of restful sleep.
Not that the president is exactly at the top of his form when it comes to economics. Even the president's most ardent supporters moan at the incompetence of his team, especially the crew at the Treasury. They deplore the extent to which Karl Rove's political machine now determines and dominates economic policy-making. Not all great political kingmakers make great economic policymakers.
Little surprise, then, that Bush has so badly botched his efforts to "reform" the social security system. First, he declared it to be in "crisis," only to retreat from that claim when the numbers proved it difficult to sustain. Then he called for personal accounts, only to find that earnings on such accounts might be too low to make them attractive. Finally, he was forced to concede that his plan will involve a major reduction in what middle-income and high-earners have been led to believe they will receive from an unreformed system. The president promised to spend his political capital; instead, he seems to have squandered it.
All interesting stuff, but all less relevant than the fact that only the most jaundiced observer can deny that developments in the U.S. and world economies are such that America's preeminence is assured for decades to come.
Start with Europe. The continent's leading economies are bedeviled by double-digit unemployment that is a result of rigid labor markets and excessive regulation. Their leaders' solution? More rigidity, more regulation, and an attack on what Franz Müntefering, head of Germany's Social Democratic party, calls the "growing power of capital."
As if to show that there is no regulation too ludicrous for adoption, Spain's stock market regulators now require all company directors to disclose related-party transactions with anyone with whom they have "affectionate relationships," interpreted to mean lovers. Spain's gossip columnists are set to become avid readers of corporate annual reports.
Then there is Great Britain. Not to be outdone by Spanish regulators, the town council of Blackpool last week granted a 48-hour week to the 228 donkeys that carry children for rides along the town's beaches. The rules state that the donkeys may work only from 10 AM to 7 PM, with one hour off for lunch, and Fridays off, on which day their hooves, ears, teeth and coats will be inspected by veterinarians to make certain that the donkeys are fit for work. "We want them to be happy and healthy," said a spokeswoman for the town council, naturally sympathetic to the hard-working asses.
More seriously, the Labour government's stated attempt to find a third way between America's free market capitalism and Europe's corporatism has been abandoned in favor of a lurch towards a high-tax, increasingly regulated economy that is already producing consumer angst, stock market jitters, and depressed businessmen.
The EU obligingly provided Britain a final push down the road towards stagnation when the European Parliament voted by a substantial majority (378-to-262) to require Britain to join its EU partners in restricting the work week to 48 hours. France already has a full-time enforcement unit out and about to sniff out any workers who dare put in more than 35 hours per week. The Spanish member of parliament who proposed to lock the UK into the EU's downward spiral boasted, "We are starting our long march toward a social Europe." It promises to be an unpleasant stroll for Europe's army of unemployed workers.
Meanwhile, in America, worker productivity continues to outpace that of Europe, in part because low taxes give American workers an incentive to work longer hours. This, in sharp contrast to the preference for leisure created by Europe's combination of taxes that shrivel take-home pay, and generous benefits to the unemployed.
Perhaps even more important is the contrast between the attitudes towards immigration that now dominate European and American thinking. The French and Germans, fearful of competition from East European plumbers, electricians and other service workers, have scuttled a plan to allow every European to ply his trade in any EU country. Better high costs than competitive labor markets.
By contrast, most (but not all) Americans seem to agree with President Bush that immigrants make a positive contribution to the American economy. Mexicans pour across the porous border in pursuit of work and, in many cases, the American dream. They want to buy homes, furnish them at Wal-Mart, send their children to schools at which they can learn English, and otherwise become Americans. There are few instances of immigrants aching to pursue the German dream, or, for that matter, Scotland's socialist dream.
Which brings us to China, clearly a rising economic power. But there is an emerging view that the Chinese will grow old before they grow rich, such is the age distribution of the population. Equally important, the Chinese regime is finding it increasingly difficult to maintain the undervalued currency that contributes to its competitive advantage, and to allow the wide range of freedoms that an entrepreneurial class must have if it is to drive national prosperity.
None of this means the American economy is problem free: it isn't. But inflation is under control, millions of jobs are being created every year, profits are rising, the federal deficit is declining relative to the size of the economy, and even the massive trade deficit may have started to come down. There aren't many countries that can match that performance.
A version of this article appeared in The Sunday Times (London).
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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