The Party’s Over

The Old World sent the New World a message Monday, grim enough to put a chill on the happiest of holidays. The party’s over.

Under a recent agreement among the seven biggest industrial nations, three central banks spread a new safety net to stop the decline of the American dollar. The dollar fell right through the net to new lows against four national currencies.

The message is that the problem is not the dollar but the very texture of the U.S. economy. The White House did not get the message, or at least did not get it straight. A spokesman said simply that it did not want the dollar to fall further.

In mid-1985 the Reagan Administration began nudging the dollar lower. The theory was that an expensive dollar made American exports too costly to tempt consumers in other countries. A cheaper dollar would help turn around a trade imbalance that at the time saw Americans buying more foreign goods than they exported, to the tune of $139 billion a year.

In practice the national debt kept shooting up, with private debt more than keeping pace. Buying on the cuff, American consumers made the United States a paradise for foreign producers. The dollar fell, but an avalanche of foreign goods kept pushing the trade imbalance higher.

Monday’s message is clear enough. The falling dollar is only a symptom of deep and widespread problems in the American economy. If this were a Third World nation, bankers from the International Monetary Fund, their smiles like chain saws, would long since have come running to order Americans to tighten up.

The 1981 White House experiment with supply-side economics was a clear failure. In company with major increases in defense, it achieved nothing beyond helping to force the federal deficit to incredible heights.

A principal author of the message from the Old World was West Germany. The country was nearly destroyed early in this century by debt and inflation; a combination of long memory and fear of history repeating itself has kept Germany’s books balanced for 40 years.

The message is not new, even here in the New World. It has simply been ignored. Rather than putting its own affairs in order, Washington has tried to persuade Germany to abandon its fiscal austerity so that its citizens could buy more American goods and to sweet-talk the dollar into stability, acting like a heavy loser at Las Vegas trying to recoup rather than reform.

The rules of international trade are no different from the rules of commerce on Main Street. A merchant who lives beyond his means either goes broke or comes so close to it that other merchants are afraid to take his checks.

The reform of the nation’s economy will necessarily be slow to avoid abrupt moves that might bring on a recession. It also will be difficult. One important element will be binding agreements with the Soviet Union, already being negotiated, that will allow more defense dollars to be diverted to capital investment. Another will be higher government revenues, well above those approved by Congress this month, to move Washington closer to a balanced budget than it is now. Some domestic spending must be reduced, but other programs, with particular emphasis on public works that facilitate the movement of goods, must be increased.

No change will be possible, however, without a national dialogue based squarely on reality to replace the monologue of good news and good feelings that has marked economic policy for too long. The nation should accept nothing less, because it can afford nothing less.