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America debates whether or not to invade Iraq, fears that the country's economic
recovery will stall are beginning to creep into the discussion; with that,
worries about the health of the global economy are growing, too. A consensus is
emerging that the gap between the US economy's growth potential and its actual
performance will remain large for some time to come. Can the situation get
worse? Yes, it can: much worse.
number of worrying factors about the US economy have been around for a long
trade deficits have persisted since Ronald Reagan's misguided tax cuts of
1981 converted America from the world's largest creditor into the world's
largest debtor. Today, these deficits set new records by the month;
appallingly low savings rate. When American wealth seemed to be growing year
after year as the stock market boomed, this was understandable; individual
Americans were becoming richer without savings, so why bother? Today's
savings rate, while it has increased slightly, still finds America at the
bottom of the world's savings league tables;
accounting standards. The Arthur Anderson, Enron, and WorldCom scandals
didn't emerge out of thin air, but had their origins in the mid-1990s, when
the US Treasury actually intervened to stop attempts by the supposedly
independent accounting standards board to improve matters. Bad accounting
contributed to the recent stock market bubble; bad information led to stock
prices that did not reflect underlying realities; and these in turn provided
incentives for the excess investment in telecoms that caused today's excess
this old brew, new ingredients have been added, notably the most rapid change in
a nation's fiscal posture the world has probably ever seen. In a "now you
see it, now you don't" move only a magician should love, the $3 trillion,
ten year (non social security) US budget surplus was - in a matter of months -
converted into a gaping deficit of $2 trillion dollars.
course, excuses are at hand: the magnitude of the economic downturn was not
anticipated and the increased expenditures to fight terrorism could not be
foretold. Excuses, excuses. As the old saying goes: Don't count your chickens
before they hatch. The Bush Administration not only counted its chickens, it
sold them forward!
anyone with decent eyesight, it was clear that the rosy budget projections of
two years ago were nonsense. Clear, too, was the fact that, in promoting its tax
cuts, the Bush Administration was engaging (on a multi-billion dollar scale) in
dishonest, Enron-like accounting.
if things are so bad now, how can they get worse? Here's a plausible scenario.
finance its trade deficit, America must borrow from abroad over a billion
dollars a day. When America was the only safe haven for global investors, this
was easy. But America today appears less safe. The combination of lack of
confidence in US corporate accounts, lack of confidence in America's economic
policy management (compounded by the mounting deficits), and America's soft
underlying economic fundamentals, has dented the US economy's global reputation.
foreigners start pulling their money out of a country they suspect, the dollar
will weaken. As the dollar weakens, America looks even less safe. So a rush to
the door begins.
a weak dollar may be good for exports, a falling dollar will be accompanied by
stock market losses and greater declines in confidence. Eventually, even the
almighty American consumer will be shaken and realize that he is poorer today
than three years ago and that he better start putting money away for his
retirement, especially given Bush's proposed risky experiments with the social
that point, Americans will join the stampede out of their economy. Why shouldn't
they? They're free to choose where to put their money. Europe's stock markets
will begin to look like an attractive alternative.
this scenario offers no happy ending for Europe. A weakening US economy and the
strengthening Euro will dampen European exports. The European Central Bank,
fixated on inflation, will be slow to lower interest rates, and the European
Stability Pact will make it impossible for fiscal policy to offset these
weaknesses. Europe will join America in a downturn, reinforcing America's
decline and setting in motion a global downward spiral.
am not predicting that this will happen. I hope that the Bush Administration
will enact policies to strengthen the US economy: a tax cut that might make
minimal sense when it seemed that the US had a multi-trillion dollar surplus no
longer makes any sense at all. The Bush Administration should admit this, and
redesign a tax program to strengthen the economy by making the country live
within its means. President Bush could even stabilize the economy, offering
better unemployment benefits to provide needed stimulus if the downturn
is strong, and the global economy is strong. Should the disastrous events
contemplated here occur, a new global economy will eventually emerge from the
of course, can never be fully prevented. We can, however, decrease their
frequency; we can make them shallower; we can ensure that fewer people are hurt
and that those that get hurt are better protected. Sadly, we are doing less than
is possible to prevent things from getting worse and doing less than necessary
to protect ourselves from the consequences.
E. Stiglitz is Professor of Economics and Finance at Columbia University, the
winner of the 2001 Nobel Prize in Economics, and author of "Globalization
and its Discontents," published by W.W. Norton [The German edition,
"Die Schatten Der Globalisierung," was published by Siedler; the
French edition, "La Grande Desillusion," by Fayard].)
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