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
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.