Recession Blues Won’t Play Abroad

Virturally all indicators show the American economy slowing down, and worries about a recession are mounting. In this unprecedented sixth year of a business expansion, even optimists are holding their breath.

A deep slump would be a deadly blow to many debt-strapped Americans and companies, but it could also lead to a major foreign-policy confrontation with the two countries on which America most depends--Germany and Japan.

Since the mid-1970s, whenever American growth has stalled, Washington has pressed Bonn and Tokyo to rev up the growth engines in order to stimulate American exports. Although the strategy never really worked--governments aren’t altruistic--it continues to be the conventional prescription in Washington and Wall Street whenever America is in economic trouble.

Now, with U.S. trade deficits stuck at $120-billion levels and the surpluses of West Germany and Japan showing no sign of shrinking, Washington’s arm-twisting could start again. If on top of the trade imbalance there is a recession in America, the United States is likely to turn up the heat full blast.

And we can expect West Germany and Japan to say, simply, “Get lost.”

For Bonn, the idea of abandoning its tight-fisted anti-inflationary policies to accommodate Washington is a non-starter. Under American urging, Germany tried reflating its economy in 1978. It saw its own price levels jump as a result, and vowed never again to be a “locomotive” for the United States

Japan, too, will say “no.” Its economy grew by almost 6% last year. In 1989 it is projected to outpace the growth of any other industrial country. The message from across the Pacific is apt to be clear: Enough is enough.

In both countries, companies are producing flat-out, wages are moving up and inflation is rising. Their inclination is to raise their interest rates and contain growth, not accelerate it. Last month the Bundesbank, West Germany’s central bank, stunned everyone by doing just that. Speculation is rife that the Bank of Japan will follow suit.

Each government is in a weak position to take any measures that are not immediate vote-getters. Chancellor Helmut Kohl’s popularity is at an all-time low, and Prime Minister Noboru Takeshita, mired in a bribery scandal, has already announced his resignation. His Liberal Democratic Party will be scrambling for years to regain popularity.

Both countries have increasingly less reason to kowtow to America. Not only has Soviet President Mikhail S. Gorbachev made them feel less in need of American protection, but their economic dependence on Washington is weakening.

West Germany sees its economic future not in trade with North America, but in the markets of a more integrated Western Europe. Japan, in contrast to the days when the American market was its only real option, today is building a trade and industrial empire from Seoul to Sydney and rapidly expanding its financial and industrial links to Europe.

In the event of an American recession, both Bonn and Tokyo would probably believe, genuinely, that nothing they do could really help us. They would say to themselves that the answers to U.S. overconsumption, poor savings and investment and lagging productivity lies in Washington, Wall Street and Peoria--not abroad.

By their inaction, America’s two key allies would in effect be demanding that the United States put itself through a painful and protracted wringer. But they are, after all, our creditors and such hard-nosed behavior is typical.

A confrontation between America and its allies ought not to surprise the industrial nations’ finance ministers and central bankers. Since 1985, when they started to manage the dollar, they knew they were dealing with the symptom and not the root problem--which was that America was living beyond its means and doing nothing about it.

With Bonn and Tokyo staying on the sidelines, it is not hard to envision red-faced, frustrated congressmen screaming for retaliation. Because of our $175-billion budget deficits, there will be no way to use government spending to boost the economy out of recession. And because of a precarious dollar--now held up by high interest rates--the Fed would be scared to ease up on rates to stimulate growth, lest foreigners with dollar investments dump our currency and cause it to collapse. Without these fiscal and monetary tools that Washington has historically used to overcome serious downturns, the only thing to hope for would be a foreign bailout--and it will be a vain hope.

Given today’s hair-trigger markets, even a shouting match between Washington and its allies could send the stock and currency markets into a tailspin. But it could also aggravate a host of security-related problems with Bonn and Tokyo.

There are no easy answers for the Bush Administration, especially as long as lip-reading is in vogue and shameful gimmickry substitutes for a farsighted fiscal policy. But there should be no illusions about where our most explosive foreign policy problems could be.