The American Slowdown Reaches the World
August 6, 2001
by Irwin Stelzer
America is the culprit. All of the world's ills, it seems, originate in the United States. The world is warming because Americans drive big (safe) cars, and its cowboy president won't sign the Kyoto protocol. A new arms race is starting because America wants to build a defensive missile shield. The world's health is threatened because Americans have improved the efficiency of their agriculture by genetically engineering various crops. And a world-wide recession is beginning because the American economy has slowed down.
That the economy has slowed there is little question. What is at issue is whether the economy has finally bottomed out. The Federal Reserve Bank of Chicago late last week divined "a greater risk that the U.S. economy is in a recession than in any previous month this year." Treasury secretary Paul O'Neill disagrees. He says the economy is growing, and will grow at an even faster rate in the fourth quarter of this year (at 2%) and all of next year (3-3.5%). "When someone tells me that we're in recession, the first thing I say is look at the data," he told the British press during his visit to London.
Federal Reserve Board chairman Alan Greenspan is known for doing just that - squeezing every bit of insight to be had from published and unpublished data. He thinks that "We are not free of the risk that economic weakness will be greater than currently anticipatedGÇª". Perhaps a conference with the Treasury Secretary might reveal to the Fed chairman just which data he has overlooked.
In short, no one really knows where the economy is headed. But for the first time in many months there seems to be an emerging consensus that the worst is behind us. The generally cheerless analysts at International Strategy & Investment headlined one of their reports last week, "More
Bottoming Evidence," the head of worldwide economic research at one of the largest investment banks told me that he has the feeling that we have reached the bottom, a leading media player says that things have stopped getting worse, and Intel president Craig Barrett told an audience in Malaysia that "the computer industry has bottomed out".
Perhaps. Then again, perhaps not. Politicians around the world, however, are convinced of one thing: that the strains in their own economies are all due to the problems in America. It was not so many months ago that policymakers at the European Central Bank and the finance ministries of
Germany and France were declaring themselves immune to America's problems.
They argued that the great bulk of Europe's trade is among the nations of the EU, that the American market is not crucially important, and that even as the US economy faded theirs would flourish.
Now that Germany is headed for a recession, France's growth is stalled, and the British economy has gone from buoyant to sluggish, it seems that all of Europe's ills were made in America - the same America that only a few months ago could not effect Europe's economies. It is ndoubtedly true that America's slowdown is not good news for the rest of the world. But it is also true that a good part of the problems faced by the other leading economies are homemade, and will in the long run prove more damaging to them than a
blip in the US growth rate.
Japan relied on a corporatist model that has brought it to the edge of penury, with more pain in store for at least three years, according to its new prime minister. We now know something we denied when it seemed that the rising sun was the wave of the future: an economy characterised by private
sector monopolies and oligopolies, working closely with government planners, abetted by politicians who pressure banks to carry bad loans rather than foreclose on inefficient enterprises, is doomed. It took no ill wind from America to blow down that house of cards.
Euroland is the victim of a somewhat different set of policy bloopers. The European Central Bank, in contrast with America's Fed, has decided to keep interest rates high, and the European Commission, in contrast with the Bush administration, has decided that high taxes and tight fiscal policies are somehow appropriate for slumping economies. In Germany, laws protect inefficient managers from hostile takeovers. In France, rules limit the hours that executives can work (enforced by police checks of company parking lots
to identify workaholics who linger in the office beyond the statutory 35 hours each week), and taxes remain high. Throughout the EU, manufacturing and service industry productivity lags behind the ability of the Brussels
eurocracy to produce regulations that drive costs up and entrepreneurs mad.
Easier to blame America for the resulting economic problems than to re-examine the made-in-Frankfurt-and-Brussels policies that are the real cause.
Which brings us to Great Britain. Thanks to its refusal to adopt the euro, and the wisdom of its chancellor in granting the Bank of England semi-independence (its members, appointed by him, are free to figure out how to meet the inflation targets he sets), Britain has so far escaped some of
the ills that afflict its continental neighbors. But now, having sown the wind with billions in new taxes, and more regulatory burdens on small business than entrepreneurs can bear, it is about to reap the whirlwind - an economic slowdown. Not surprisingly, having trumpeted its ability to "end Tory boom and bust," New Labour needs someone to blame for its emerging problems. Unwilling to blame the competitive disadvantage imposed on its industry by the anemic euro, lest it be considered a bad European, or the
tax, regulatory and cost burdens it has heaped on British workers and companies, the government blames the American slowdown.
Over a century ago the great American poet Walt Whitman dreamed that he "saw a city invincible to the attacks of the whole of the rest of the earth".
He might have described all of America that way. A good thing, given the blame game that is now going on in the world.
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.