When Doing Nothing Is Healthier Than What Deficit-Doctors Order

It’s time someone put in a good word for political paralysis. More than a dozen presidential candidates are plying their peculiar trade, grinding out position statements, seeking the mandate to sally forth against a sea of real or imagined economic dangers--America’s international debt crisis, the trade crisis, the deficit crisis, the currency crisis, the industrial crisis. At the same time, the team surrounding the outgoing occupant of the White House occasionally makes noises about taking some decisive action in the name of the President’s “legacy.”

There is no question that the world’s economic system is on the threshold of a major restructuring. The global financial arrangements worked out in the aftermath of World War II were based on the assumption that the United States was so much richer than anywhere else it could act as the world’s banker, broker, paymaster, financial disciplinarian, supplier of industrial goods and military protector--all at the same time.

That is clearly not true anymore and it is nonsensical to portray America’s trade deficit an unalloyed “good,” as President Reagan and supply-side guru George Gilder have recently argued. But the crisis-mongers have a grip on reality every bit as precarious. When the choice is between paralysis and ignorant flailing in the dark, the charms of torpor take on considerable appeal.

Consider the “crisis” of America’s external debt. From being a net creditor to the rest of the world, according to the Commerce Department, America’s external balances swung in just a few years to a net deficit of $265 billion by the end of 1986, making the United States the biggest national debtor in the world and prompting panicky rhetoric about the United States “standing tall while on bended knee.”

But as the Commerce Department admits in its own fine print, there is no net external deficit; the scary numbers are largely accounting conventions. American corporate assets overseas, mostly acquired in the 1960s and 1970s, for example, are valued at their purchase price, not at their current market value, which is silly. In 1986, the United States enjoyed a small net inflow of interest and dividends of $20.8 billion from foreign assets, which is a more precise indication of a creditor or debtor position; inflows and outflows were still roughly in balance at the end of 1987.

The word “debt” in this context also means something different from what the ordinary person understands by the term. Any asset in America held by a foreigner is considered an American “debt,” whether it’s an apartment in Manhattan or a Nissan plant in Tennessee. The globalizing of capital flows is also a key factor. Bankers have worked hard to gather foreign bank deposits and sell Eurobonds and “Euro-equities,” but they all go into the Commerce Department’s “debt” column. Clearly there has been a major reordering of world asset holdings, with unquestionably profound political and financial implications. But it’s far from clear that this constitutes a “crisis,” or that emergency measures of any form are called for.

The trade deficit is surrounded with similar puzzlements. West Germany, for example, is often held up as an economic paragon for building huge external surpluses throughout the 1980s. But West Germany’s trade success has been bought at the price of a nearly non-existent growth rate for the entire decade and a 9% rate of unemployment, about four times higher than its postwar average. Whether that is the path of wisdom is at best arguable.

The whole concept of a trade balance shifts meaning in subtle ways with the rise of the supranational company, led by U.S. giants like Ford and IBM. The fact that Ford is the most important European car manufacturer doesn’t show up in the trade statistics because its cars are made in Europe. Japan is “fixing” its car-making surplus with America by moving auto factories here. The typical American car part shows up in the trade statistics about three different times--perhaps as an import if the raw material is purchased overseas, then as an export when the components are sent overseas for fabrication and assembly, and again as an import when the finished component is returned for final assembly here.

Politicians still prattle about the manufacturing “crisis” in terms of a “rust bowl” wasteland. In fact, manufacturing’s contribution to the gross national product--about 23%--has not changed at all during the entire postwar period and is as high now as it ever was. Manufacturing productivity has risen at about a 3.5% rate throughout the 1980s, the best record in history.

At the margin, the pretax cost of producing a ton of steel in America is now lower than in Japan. So much for “competitiveness.” The country’s manufacturing capacity is running flat out and has been for some time. Albert M. Wojnilower of First Boston worries about manufacturing overheating, and canny investors were flocking to the Midwest to buy up capital goods companies well before December’s 78% jump in machine tool orders.

The globalizing of capital further confuses trade dynamics. Economists were surprised when Japan could still afford to export after the dollar fell sharply against the yen. But the dollar is a global currency. The raw materials Japan purchases are priced in dollars, so Japanese costs dropped immediately. Just as important, the Pacific “tiger” economies, like South Korea and Taiwan, peg their currencies to the dollar, so the Japanese quickly moved about 30% of their car production elsewhere in Asia. Owning the world’s only truly international currency carries both benefits and costs.

Or consider the federal deficit. The conventional plaint is that America’s fiscal madness has caused federal interest payments to grow to the point where they account for the entire $150 billion deficit. That is true. About $25 billion of the interest is paid to foreigners--not much on a $4.6 trillion economy--and most of the rest paid to American pension funds and banks. The economic implications of such financial reshufflings are at best obscure; and the nature of the “crisis,” if there is one, at least uncertain.

Prudent paralysis is not the same as mindless Panglossism. Sea changes are under way in the world economy; the various imbalances and “deficits” are but symptoms and harbingers. In all likelihood the very vocabulary and concepts we use to describe national success and failure will shift in important ways. But for a time at least, we might breathe easier if the politicians, instead of doing something, will just stand there.