U.S. Should Follow EC’s Turnaround Lead
If we could see ourselves as others see us, as the poet Robert Burns put it, we might make sense of the contradictions swirling around the U.S. economy.
In Washington, President Bush and Congressional leaders began emergency talks on the federal budget deficit Tuesday, even as the stock market hit yet another historic high.
Experts say the stock market is rising because U.S. interest rates are headed lower, but the budget summit is occurring because interest rates have stayed high this year, when budget planners had counted on them being a full percentage point lower.
The result is that the government’s interest payments on the national debt may rise by $30 billion to more than $200 billion. That’s right, $200 billion in interest. The understandable fear in Washington is that the deficit may be out of control.
What does it all mean? You won’t find out by looking at the U.S. economy in isolation but only by seeing it as part of the mosaic of the world economy. And there the news is challenging, yet hopeful--the U.S. faces a crisis of confidence related to the government’s handling of the budget deficit but could turn the situation around the way Europe did in the 1980s.
The old continent is now the chief attraction for global business investment--with $10 billion a year flowing from Japan alone--just as the United States attracted such investment in the early 1980s.
“To some extent, investment is being diverted from Latin America and the U.S.,” says Peter Rogge, senior vice president of Swiss Bank Corp. And investment in Europe is only increased by the opening of Eastern Europe. The result, says the Swiss Banker, is that global demand for investment capital has made interest rates 1.5 percentage points higher than they would otherwise be.
So the U.S. deficit has been hit by a double whammy--the foreign investment that made it easier to finance the deficit in the ‘80s is no longer flowing this way, and Europe’s demand for investment capital is keeping interest rates relatively high.
Moreover, says Rogge, that pattern may continue for at least five years--with the West German economy growing 6% a year and many of the other European countries growing 4%--compared to slower growth, perhaps 2% a year, for the U.S. economy, in the estimate of Swiss bankers.
It’s a picture of a changing world. At those rates, the combined economies of the 10-nation European Community will be as large as the U.S. economy in five years--with Japan third, at roughly 60% the size of the United States or Europe.
But rather than worrying about waning influence, the United States would do better to look where Europe came from. Half a dozen years ago, Europe’s economies were moribund and lagging in investment--which was then flowing to America. “The world thought Europe’s only future would be as a theme park for visiting Japanese business people,” says Peter Sutherland, a former member of the European Commission, the EC’s ruling body, and now chairman of Allied Irish Bank in Dublin.
But the Europeans woke up. In 1984, at a conference outside Paris, the EC nations set a goal of true economic union by 1992 and have been working toward that vision ever since. Yet investment capital started flowing immediately after they set the goal, says Sutherland. “Capital is an incident of confidence, really,” he says. “If there is confidence, investment follows.”
Which is just the point. Capital seems very scarce in America these days. Both Richard Darman, director of the Office of Management and Budget, and Sen. James Sasser (D-Tenn), chairman of the Senate Budget Committee, talk of a “capital shortage.”
But confidence also seems in short supply. Swiss banker Rogge, who has visited America for years, says he misses the old dynamism. “I find American business people skeptical these days--skeptical that prosperity will continue indefinitely, skeptical that U.S. industry is really competitive . . . “
What accounts for that? Observers foreign and domestic trace the problem to the budget deficit, which they see in terms of national will more than economics.
The Economist magazine calls the U.S. deficit “an unmistakable symptom of a dishonest political culture.” Its strong words refer to all the tricks of off-budget financing, use of Social Security funds and borrowing from abroad that U.S. administrations have used to mask the true size and impact of the deficit.
And Herbert Stein, former chairman of the Council of Economic Advisers, says the budget deficit--by limiting funds for private industry--curbs growth in U.S. investment, productivity and incomes. Stein, 73, says the idea that the United States lacks capital is nonsense. “In an economy with a gross national product of $5.5 trillion, it is not credible that we do not have the money to deal with our national and social needs,” he says. But Stein blames cowardly politicians, afraid to raise taxes or cut programs for people who are not poor--including many elderly--for sapping of the nation’s confidence.
Now, however, the diverted flow of foreign money and the deficit’s frightening rise may force a change. The aftermath of the budget summit will likely see some higher taxes--possibly a gasoline tax, although not the 50 cents a gallon that Easterners call for and Westerners oppose. Alcohol and tobacco will be taxed. Changes in Social Security taxes and capital gains will be closely argued, at least.
Will taxes be bad for the economy? Not if they represent an honest attempt to narrow the budget deficit. The very action itself could restore confidence, bring down interest rates and spur investment. The rising stock market may be a hopeful sign--but then it had better be.
The stakes are high. Six years ago, as EC commissioners gathered near Paris, the rest of the world thought Europe was finished--but it is disproving that judgment. Now many people and nations think the United States is in decline. Whether they can be disproved may depend on Americans asking why they think that way.
