The World Waits on the U.S. Economy

The world’s finance ministers ended their meeting in Washington over the weekend. No need to wait for the communiqué—it was probably drafted by the ministers’ sherpas well before this annual meeting of the International Monetary Fund and the World Bank. The real decision, and one that dare not speak its name, is to rely on the American consumer to provide the world economy with a modicum of economic growth for the foreseeable future.

Germany, Europe’s largest economy and its one-time economic locomotive, has become a little engine that can’t. Its over-regulated, over-taxed economy can neither grow nor create private-sector jobs, and its government’s response is to divert the voters’ eyes from its refusal to introduce needed reforms by indulging in a round of Bush-bashing and a scary announcement about a new “German way” in foreign policy.

France wants to cut taxes while at the same time avoiding the riots that typically accompany any attempt to shrink its swollen public sector. This means that, like Germany, Portugal, and Italy, its budget deficit will pierce the 3 percent-of-GDP ceiling mandated in the EU’s Growth and Stability Pact. So much for fiscal responsibility in euroland.

Britain is managing to eke out a bit of growth, but even that is threatened by the tax increases its chancellor will have to add to those he has already imposed if he is to hold to his program of massive increases in spending on the unreformed providers of public services. Add the prime minister’s confession that he plans a massive redistribution of wealth from the middle classes to the poor, and the new militancy of the trade unions, and there is reason to worry about the outlook for the world’s fourth largest economy, especially if free-spending consumers decide to take a holiday from the shops.

Japan remains the world’s basket case, its policy makers in such disarray that investors are refusing to bid for the government’s bonds. The financial system is groaning under the weight of some $355 billion in bad loans, a figure that, relative to GDP, makes the American savings-and-loan crisis of the 1980s seem a small matter.

In Latin America, Argentina is bankrupt; Venezuela’s Castro-loving president, Hugo Chávez, presides over an economy that contracted at an annual rate of 10 percent in the second quarter, and may soon follow Argentina into bankruptcy, despite increased revenues from higher oil prices. Even after a $30 billion bailout, the largest in IMF history, the Brazilian real is in free fall as investors run for cover as left-winger Luiz Inácio Lula da Silva closes in on the presidency.

Rather than risk unpopularity at home by addressing these problems, the assembled ministers hung their hopes for an increase in worldwide economic growth on their expectation that the U.S. will remain the world’s importer of last resort, and absorb the goods and services that their own consumers are not in any condition to buy.

They know that the U.S. economy is growing at a reasonable clip—somewhere between 3 and 4 percent, and that the IMF expects it to grow faster than France, Germany, Italy, Japan, or the U.K. this year and next. But America’s trade deficit is already crowding 5 percent of GDP, a level that IMF economists say privately may well produce a fall in the dollar of anywhere between 20 percent and 40 percent. That might force a reluctant Federal Reserve Board to raise interest rates paid on dollar assets, a move that would deal a blow to the halting American recovery from the short, shallow, but annoying recent recession. Or the voice of the protectionist might be heard in the land, and imports brought under control by higher duties or quotas on imports.

To avoid this dread scenario, the U.S. contingent pressed the nation’s trading partners to stimulate their own economies by lowering interest rates, making labor markets more flexible, and cutting taxes. That would increase the buying power of their own consumers, who would undoubtedly spend part of their rising incomes on made-in-the-U.S.A goods, thereby reducing America’s trade deficit. But the European Central Bank, unaware that most economists think that deflation is a greater threat than inflation, has watched Germany slide into recession without lowering interest rates, presumably for fear of unleashing inflation in better-performing economies. So Germany, one of the principal proponents of monetary union, is now paying a heavy price for the one-size-fits-all interest rate it once thought would ensure its prosperity. Little wonder that Alan Greenspan used last week’s visit to Britain to praise the “sterling” performance of the U.K. economy and the continued ability of its financial markets to dominate those of euroland, a thinly veiled warning that scuppering the pound might be bad for Britain’s economic health.

The success of this implicit reliance on American consumers to carry the world economy on their shoulders will depend on several happy developments. First, the stock market slide will either have to stop, or Americans will have to continue their amazing refusal not to allow the disappearance of some $8 trillion in their wealth to affect their willingness to spend and spend. Second, we will need still another wave of mortgage refinancings to allow Americans to cash in the increased equity in their homes, and take the proceeds to the auto showrooms and home furnishings stores, with perhaps a bit left over to spend in the struggling apparel shops.

Finally, when the time comes, as it must, that consumers decide to save a larger portion of their rising incomes, businessmen will have to assume the burden of propelling the economy forward by stepping up investment in new plant and equipment.

Whether even such an uplifting performance by the U.S. economy can offset the unwillingness of the junketeering finance ministers to come to grips with their problems when they return home is far from certain. “We are cautiously optimistic about a global recovery, with the emphasis on caution,” says the IMF’s able and candid chief economist, Ken Rogoff. As has been the case for many years now, all depends on whether America’s economy will prove to be the big engine that could pull the world’s economies along to something approximating a satisfactory growth rate.

This article appeared in London’s Sunday Times on September 29, 2002, and is reprinted with permission.