Wither the Economy in 1988?
I'm not a trained macroeconomist. And, more than ever, beginning to think that's a big advantage. Day after day I plow through the economic analyses in the Wall Street Journal, the New York Times, BusinessWeek, the Economist, and the New Republic. Of late, I've added the new Business Tokyo to my list.
Every major article has the same structure: "If we do this, then they might do that, which might lead us to ...," and on it goes. It does seem, though, that there are some things one can say almost for sure. They come under the missing heading of "common sense."
1. WE HAVE LIVED WILDLY BEYOND OUR MEANS. Economist John Maynard Keynes' most lasting legacy could turn out to be providing a justification to politicians and policy makers for ignoring long-term budget balancing. Obviously, this was not Keynes' point; he approved of spending to stimulate demand only when times were
tough. But we now have a budget permanently out of whack, and we fueled the longest post-war recovery (the Reagan Recovery) by following a straight Keynesian deficit spending strategy, while calling it supply-side economics, thanks to a wild fantasy by economist Art Laffer which led him to start scratching out curves on a napkin to justify huge tax cuts for the least needy.
We've borrowed from each other, we've borrowed from foreigners, we've passed the tin cup to anyone in sight. We've created credit and credit instruments at an unprecedented rate, even by the 20s' wildly speculative standards. We don't have a clue as to who owes what to whom, or even how leveraged we are. The leaders of the
stock markets and future exchanges have admitted as much, as they have sorted through the ashes of the Great Crash of 1987.
In a damning article on the U.S. economy, Canadian commentator Peter Cook describes our descent into debt as having started with the Reagan election, in which, he says, "[We] were turning [our] backs, in equal measure, on the politics of despair and the politics of self discipline." Princeton political economy professor Uwe Reinhardt puts it this way, "To enable us to have a larger consumption slice, a larger government slice, and about the same investment slice, the foreigners exported us machine tools, Walkmans, BMWs, and fine wines, and we exported them in
return American-made IOUs (bonds and notes) or simply legal titles to American assets (real estate or stock certificates). Unhappily for our children, they will have to regain these pieces of paper with goods and services sometime in the future." Well, if sadly, said.
2. WE JUST CAN'T LET THE DOLLAR DROP FOREVER. New York Times economic commentator Leonard Silk's New Year's Day column caused me to lose most of my appetite for 1988 and beyond. Reporting on a recent American Economic Association conference, he observed that the Democratic economic policy makers, suffering from their own version of Reagan-like fantasy, had agreed that the dollar should be allowed to fall to "competitive" levels. Which are what, vis-a-vis the yen, for instance? It's now at about 120, down from about 275 in early 1985. Should we let it go to 100, 90, how about 75? The Democrats don't need the Gephardt trade restrictions (uh, excuse me, "competitiveness amendment"). We've already imposed, de facto, a 50 percent "tariff" within the last 24 or so months via devaluation—we're soon going to leave Smoot-Hawley (a weighted 40 percent plus tariff) in the dust.
Relative to recession meek or manly, and depression, Silk observes, "The key... is confidence in the dollar." Put in the plainest terms, the gnomes of Zurich, the sheiks in the Middle East, and everybody else in between is going to scream "uncle" one of these days. Uncle as in, "Let me out," not Uncle Sam. The Wall Street Journal's silly protestations to the contrary ("Everything is denominated in dollars, so no one can pull the plug on us," or words to that effect), at some point a whole bunch of people will have had enough. We don't know when. We don't know how. And we don't know how much of "enough" it will take to lead to a crash. But one thing we did learn for sure on October 19 is that panics can happen. And we also learned for sure (parallel to the British failures of the 1920s) that when things do happen, the good old U.S. of A. will choose to point fingers and fumble about, rather than provide assertive world leadership.
All of this is just common sense, I repeat. Banking and currency systems, national or international, are built entirely on the fragile psychology of expectations, stable or unstable, positive or negative. Of late, given the reality of 24-hour-a-day global trading rooms and trading screens with no "off" switches, it is mainly the psychology of mobs (i.e. instantly-linked traders) that governs. We learned way back in the early 1970s that national intervention to prop up currencies had been irreparably wounded by the new, largely-beyond-regulation hook-ups. Or rather, we "saw," not "learned." We obviously haven't learned a darn thing.
Mr. Silk concludes with the caution that the hoops through which the White House will try to jump to avoid any election-year recession may well allow us to avoid a bump in 1988, but could set us up for a world-wide plunge in 1989 and beyond, led by a delayed, wholesale exodus by an ever-shakier dollar. Perhaps the wisest presidential candidate might be the one who tries to come in second this time, so that he can ride in, unsullied, on a white horse amidst the wreckage of '92.
3. LIKE ALL DECLINING EMPIRES, WE WILL CONTINUE TO SEEK TO BLAME OTHERS IN THE MOST VITRIOLIC TERMS, AND THUS MAKES THINGS WORSE—AND OURSELVES LOOK SILLY (AND PERHAPS DANGEROUS) IN THE PROCESS. Canadian Cook again speaks to the point, "With the U.S. position in the world in decline, much has been heard of the evils of foreigners who conspire to exploit the good nature of the American people. The Japanese are cheats, the West Germans skin flints and so on. In the coming presidential election, we are certain to hear more in this vein, from Republican and
Democratic candidates. As economic historians have pointed out, this kind of anti-foreign sentiment has been widespread among the citizens of other imperial nations as they have gone into decline." How ugly—and how apparently true. Closer to home, University of Virginia economist George McKinney underscores the point: "The value of the dollar has been dropping, making it harder for countries like Taiwan and South Korea to sell their goods to the United States. In turn, they push down the value of their currencies to remain competitive. Secretary of the Treasury Baker accuses them of unfairly pushing down the price of their currencies. They responded they should not be penalized because of the huge American budget deficit. This is a page out of the 1930s."
All of this is to say there's never been a bad call by a referee when the hometeam wins, and there's never been a honest referee in a game that the hometeam loses. The problem is, that all this name calling spirals downward, and the truth—the need for a healthy dose of self-discipline (perhaps some more tax, spending reductions, consumption restrictions)—edges further and further from the realm of the politically reasonable, as those whom we choose as leaders (Reagan, Baker, Verity of Commerce, Gephardt, and any Democrat who thinks a little more devaluation is just what the doctor ordered) only offer leadership in attempting to out-scream each other in pinning the blame on outsiders. And to me, the ordinary citizen, why should I suffer if I am told persuasively and repeatedly that I am simply the victim of unfairness, rather than reckless self-indulgence?
4. I SMELL A RAT, AND IT MAY BE US. It is invaluable to see ourselves as others see us, from time to time. So I will leave the last (almost) word to Canadian Cook, who argues, "To say the least, the Great Republic that Ronald Reagan is due to hand over to either a Republican or Democratic successor at noon on January 20, 1989, is not in great shape. Its overriding weakness is economic: A burden of foreign debt that it will take future generations many years to pay down, the threat of an imminent recession, a declining currency, falling living standards, low productivity, reduced savings, an impoverished economics infrastructure, and a huge trade imbalance that has become, in and of itself, a frustrating symbol of the inability of Americans to compete."
The bills are coming due. Well, it would be too much to expect any honest assessment from any presidential candidate (Republicans can't admit to the mess they made, the Democrats don't dare exude any pessimism, for fear of sounding Malaise II), maybe we can hope for a touch of enlightened business leadership. It was a joy to see The Morgan thin up the rose-colored lenses with its proposal to own up to the uncollectability of Mexican debt. Now that the nation's most prestigious bank has admitted to making lots of big, lousy loans, maybe we can even expect General Motors
to admit what their market share plunge has told everyone else but them—that there is a grotesque problem, in the consumer's eye, with the stuff they have been trying to pass off as high-quality goods. So how much will you give me for the Brooklyn Bridge?
(c) 1988 TPG Communications
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