A hotbed of social rest

SUNDAY TIMES (London)

April 9, 2000

FORGET the turmoil in the financial markets. We Americans remain calm, despite the fact that last week share prices took their now-famous plunge, followed by an almost equally sharp recovery. The president of one brokerage house yelled: "The game's over," according to The Wall Street Journal.

Fortunately for investors in high-technology stocks, his announcement of the death of their portfolios proved to be premature - except for the poor souls who had borrowed money using their shares as collateral. These investors found themselves on the wrong end of the dreaded margin calls, requiring them to put up more cash or have their shares sold out from under them.

But with the exception of those beleaguered few, the market's gyrations generated more excitement in the studios of the television stations devoted to financial coverage, and on Wall Street, than on Main Street. Norm Ornstein, a political analyst at the American Enterprise Institute, sums it up best: "America is a hotbed of social rest."

Not even the fact that Americans do not know who will be leading them a mere nine months from now seems unsettling. Karlyn Bowman, Ornstein's colleague and generally regarded as Washington's premier opinion analyst, points out that half of Americans say they are paying little or no attention to the presidential contest between Al Gore and George W Bush.

This may be because choosing between Gore, an environmental extremist in thrall to protectionist trade unions and the dirigiste teachers' unions, and Bush, who wants to end the "vulcanisation" (he meant balkanisation) of American society and break the federal government's "cuff links" on education (he meant handcuffs), is a prospect so unappealing as to make the opening of the baseball season a welcome distraction.

Most of the polls show the candidates running neck-and-neck, although the voters seem to give Bush higher marks for "leadership" than they do the vice-president.

A quick and unscientific poll that I took of politics-watchers here in Washington was not particularly helpful. Bill Kristol, the conservative editor of The Weekly Standard and a supporter of John McCain's lost run for the Republican nomination, thinks that Gore will end up in the White House. He says this is because he has a better chance of building on his core support, in part because his conservative opponent has not yet fashioned a programme that is coherent and attractive.

George Will, the equally conservative columnist, thinks Bush will survive a tight race to become our next president, even though Gore will carry the northeast, including New York State, and California, which has the largest bloc of electoral votes. As Will sees it, Bush will build on his southern and Rocky Mountain base by carrying important Midwestern states. If Will is right, the Blairites, who have made no secret of their preference for Gore, might find the White House a chilly place come January 2001.

In the end, the race may be decided by the state of the economy. Gore has gone to great lengths to take credit for the ongoing expansion and will benefit enormously if the economy continues to outperform even the most optimistic forecasters.

The manufacturing sector is growing at a strong pace, construction spending continues to rise, and consumers continue to spend and spend. Car sales are steaming along at a record pace and vehicle manufacturers are setting near-record production schedules for the next several months. One of the nation's largest dealers told me the recent spurt in petrol prices had not cooled the demand for giant sports utility vehicles: nationwide sales of Chevrolet's nine-seater Suburban rose by 13% in March.

Perhaps even more important, productivity continues to rise. Economists at Goldman Sachs report that the information-technology revolution has boosted the annual productivity growth rate by more than a full percentage point, to somewhere between 2.5% and 3%. This, they say, "increases the economy's speed limit" and should prevent the Fed from turning "truly hostile".

Nevertheless, like most observers, Goldman Sachs expects a bit more tightening when the Fed next considers interest rates, since Alan Greenspan, chairman, again made clear last week that he is nervous that the rapid growth of consumer demand is outstripping the ability of the economy to supply the desired goods and services. So he will undoubtedly raise interest rates, probably several times before the year is out.

This seems to trouble investors not at all - for good reason. Most experts now expect the American economy to grow at between 4% and 5% this year. That means that jobs will remain plentiful and incomes on the rise. And if the recovering European and Asian economies manage to suck in more made-in-the-US goods and services so as to bring the trade deficit down, and higher interest rates slow spending and increase savings, the economic imbalances that have been troubling Greenspan might decline.

Better still: even if share prices do drop sharply, that fall may prove to be a non-event. The Nasdaq index of high-tech stocks can drop quite a bit before investors find themselves in real trouble. The index is now at about the same level as the beginning of the year - about 70% above year-earlier levels.

While no investor is likely to admit to an easy come, easy go attitude, it is difficult to see how even a substantial fall in prices can cause investors to do more than cut spending by enough to reduce the growth rate from its current level of more than 5% to 3%-4%.

Those who think the current rate is sustainable would be disappointed. But the Fed, worried about a new onslaught of inflation because it has yet to buy fully into the theory that the supply side of the economy can grow as fast as the demand side, would breathe a sigh of relief.