World's Economy Still Depends on America

President Bush says the combat phase of the war against Iraq has been successfully concluded, and Alan Greenspan’s doctors say the Fed Chairman’s minor affliction has been successfully treated. So the president flew to the aircraft carrier USS Abraham Lincoln to meet and thank his troops, and Greenspan returned to Washington to meet and joust with congressmen eager to learn his latest views on the economy.

Bush received a better reception from his troops than he got from the central banker he has just nominated for a new term. Greenspan told Congress that he remains opposed to the president’s tax cut unless it is matched with an equal cut in expenses. Any student of Congress’s spending proclivities, and Bush’s relaxed attitude towards the cost side of the ledger, knows such cost cuts are not likely.

Which means that Greenspan doesn’t think it a good idea to cut taxes. He worries that red ink as far ahead as the eye can see will drive up long-term interest rates and abort the relatively weak recovery now underway.

Greenspan also knows that the tax cuts are unlikely to provide a timely stimulus. For one thing, they are trivial compared to the size of the U.S. economy—perhaps three-tenths of one percent over the ten years in which they will be in effect. For another, by the time the Congress agrees on a tax package, the economy should be well on its way to more rapid growth.

At least, that is what Greenspan told the House Financial Services Committee he sees in his admittedly cloudy crystal ball. “I continue to believe the economy is positioned to expand at a noticeably better pace than it has during the past year. . . .” If it does not, the Fed is prepared to cut interest rates once again, a move some Fed-watchers expect its monetary policy committee to take when it meets later this week.

All of this is of no small moment not only to the United States, but to the rest of the world. For many years the U.S. has been the locomotive tugging the major economies of the world behind it. With the locomotive low on steam, the Americans urged their international colleagues at the recent meetings of the world’s financial institutions to increase their several nations’ growth rates by lowering interest rates and taxes, reforming their rigid labor markets, and easing some of their growth-stifling regulations. Responses included the non and nein to which Americans have grown accustomed of late.

Which means that the world remains highly dependent on America, as a quick review of the other economies makes clear. Start with Britain, perhaps the best performing of the major European economies. Manufacturing orders are at their lowest level in four years, taxes are rising to fund the billions being wasted on the unreformed public services, shops and hotels in London are suffering from an absence of tourists, and the trade unions are becoming increasingly militant. The consumer-led economy may nevertheless grow, but not at a rate that will do much for the rest of the world.

The German economy is a basket case. The unemployment rate is 11 percent, and rising. Unable to fire incompetent workers, employers won’t hire any, and the unemployed are so well compensated that they have little incentive to look for work. And Germany no longer owns the monetary and fiscal policy tools with which to build a recovery. It surrendered them when it traded the deutschemark for the euro. Unfortunate, since the euroland-wide interest rate set by the European Central Bank is a full percentage point too high for Germany’s no-growth economy, and the misnamed Growth and Stability Pact threatens Germany with huge fines unless it raises taxes or cuts outlays, exactly the opposite of what its economic circumstances require.

Nor is there much hope for the future. Capital is in flight, with high-tech Infineon, publisher Axel Springer and even Deutsche Bank looking to move to more business-friendly countries. And German businessmen tell me that the grudging reforms being proposed by Chancellor Schroeder are too little, too late.

France is in no better condition to lead a world-wide revival. Its economy grew at a rate of merely 1.2 percent last year, and in the final quarter experienced what some economists politely call “negative growth”—meaning that it shrunk. Business confidence is at the lowest level ever recorded, and the consumer saving rate has soared to 18 percent in response to worries about the viability of the state pension system. Like Germany, France is a victim of euroland’s inapt one-size-fits-all interest rate and austere fiscal policy.

Nor is relief to come from what may be the world’s fastest growing economy, China. It seems likely that post-SARS China will grow at a rate of about 7 percent. But that growth will be export-led. China’s currency, the renminbi, is tied to the dollar, and is now conceded by all economists to be seriously undervalued. Add to that China’s low labor costs, and you have a country able to penetrate American and other markets, but not likely to provide much of an increased market for goods produced in the rest of the world, at least not soon.

So it is down to the U.S. to give the world a boost. Our consumers continue to do their part. After taking a breather in February (weather) and March (war), their confidence soared in April and they resumed their purchases of homes and visits to the malls. But businesses remain on the sidelines, some afflicted by excess capacity, others by a lack of pricing power, still others by fears that a weak jobs market—the unemployment rate rose to 6 percent last month—will eventually drive consumers from the shops and continue the slide in manufacturing activity, new orders and new construction reported late last week. Those clouds may be dissipating. Low inventories; recent earnings reports that beat expectations; rising cash flow; and last month’s share-price recovery might just persuade America’s gloomy CEOs to dust off long-postponed investment plans. The rest of the world had better hope that proves to be the case.

This column appeared in London’s Sunday Times on May 4, 2003.