The Long Haul
The short-term economic forecast is blurry, but America has all sorts of advantages in the long term.
11:00 PM, Jan 6, 2003 • By IRWIN M. STELZER
IT SEEMS SAFE to assume that most readers of this piece have now pored over all of the economic forecasts for 2003, and decided between the doomsayers and the optimists. Or perhaps latched onto a consensus such as that of the 66 economists surveyed by BusinessWeek. That august assemblage of experts expects the U.S. economy to be growing at an annual rate of 3.6 percent by the fourth quarter of this year, and the jobless rate to have declined from its current level of 6 percent to 5.7 percent.
Why people study economic forecasts is a bit of a mystery, since the track record of economists is well below that of weather forecasters. I suppose some sense of certainty--even a false one--is more comforting than conceding that the economic future of a complex economy such as ours is essentially unknowable.
For economists, who understand the difficulty of short-term forecasting, the interesting question is the prospect for the American economy in the long-term. And, fortunately, that question is more susceptible to economic analysis than are the ones more commonly put to me at cocktail parties: "Where are share prices headed in the next months?" and "Will the value of my house continue to rise this year?" (My "I don't know" is generally taken as a shrewd and rude move to keep that information to myself, rather than the truthful confession of ignorance that it really is.)
There is no better place to start the process of a sensible long-term appraisal of America's economic prospects than with Bill Emmott's intriguing new book, 20:21 Vision: Twentieth-Century Lessons for the Twenty-first Century. Emmott, editor of the Economist, has all the requisite caveats and "but ifs" that one would expect of a careful analyst, and is free of the hubris that infects the authors of so many books of this sort. But there is no mistaking his conclusions about this century:
". . . the very long-term trends will again be positive and powerful: . . . democracy will spread further; . . . now-poor nations will develop and emerge as modern, richer, industrialized societies; . . . new technologies . . . will again transform work; . . . individual autonomy will develop further."
There's more, but you get the picture. Key to all of this will be a "United States of America [that] is able to, and willing to, offer . . . leadership in the cause of world peace and security, and of unimpeded trade." For which there are several reasons. One is that its people are willing to accept the costs of what the great economist Joseph Schumpeter called "gales of creative destruction" in order to reap the benefits of changing technologies, corporate structures, and flexible, relatively deregulated markets. This is what Emmott calls "America's great peculiarity . . . an American advantage relative to other rich countries."
This openness to change creates a regime in which change is seen as an opportunity, not a threat, and in which government regulation to prevent change has less likelihood of being adopted than in other countries. In turn, the absence of regulation encourages entrepreneurs to find new and better ways of producing and marketing goods and services.
"The United States is able to generate and, more importantly, to absorb new technologies more rapidly than other countries because U.S. firms face relatively modest regulatory barriers. This is an important lesson for other countries," conclude Lisa Lynch and Stephen Nickell (professors at Tufts University and the London School of Economics, respectively) after a highly technical analysis of the international labor market and other data.
Another source of this country's vitality is its people's willingness to tolerate inequality because, as a recent National Bureau of Economic Research study of attitudes of 128,000 people in Europe and America found, "opportunities for mobility are (or are perceived to be) higher in the U.S. than in Europe." It is a lot easier to tolerate a stay at the bottom of the income ladder when the route to the top is open, as it is in the United States.
Finally, because it is flexible and open to global competition, and because it has a central bank that has learned some hard lessons during periodic oil shocks and the Vietnam war, the American economy is more inflation-resistant than ever before, and therefore can sustain higher growth rates than in the past without reviving inflationary forces. As Harvard professor Gregory Mankiw has pointed out (see his essay in American Economic Policy in the 1990s, published by MIT Press), "the success of monetary policy in the 1990s" contrasted with "its failures in previous decades" because monetary authorities learned to raise real interest rates at the first sign of inflation.
None of this is to suggest that the current gap between the American and other economies is foreordained to persist. For one thing, the very success of America in maintaining world peace and in opening markets will stimulate growth in other countries, perhaps enabling them to narrow the gap with the United States. For another, most scholars agree that we are in danger of losing ground unless we can upgrade our educational system, which is now characterized by urban schools that turn out functional illiterates, graduated so that teachers can see the backs of them, rather than because they are prepared to play productive roles in the economy.
Which is merely one aspect of policy that will determine the future course of the world's economies. American policymakers have learned enough about monetary and fiscal policy to be able to cope with--although not solve completely--many of the problems that plagued the economy in the past. They know, too, that radical reform of the education system is required, with consumer choice elevated over the resistance to change of the teachers' unions. And that subsidizing failing industries such as agriculture and steel is not likely to make Americans richer.
That doesn't necessarily mean that our policymakers will apply the lessons of the 20th century to the 21st--politics and human frailty being what they are. But if they do, all of the gloom now being emitted by economic observers should prove misplaced, better reserved for countries that seek solace in protectionism, rigid control of hiring, firing, and wages, and attempts to preserve the status quo.
Irwin M. Stelzer is director of regulatory studies at the Hudson Institute, a columnist for the Sunday Times (London), a contributing editor to The Weekly Standard, and a contributing writer to The Daily Standard.