It Takes a Global Village

THE KING is dead, long live the King. Ben Bernanke finally exorcised the ghost of his predecessor, Alan Greenspan, by telling a congressional committee that the former Federal Reserve Board Chairman is wrong in contending that expansions "die of old age." But he also told Congress that he thinks current Fed policy is about right, and that he has no intention of risking an inflationary spurt by lowering interest rates, even if the U.S. economy is slowing. Which means that the famous "Greenspan put," thought to guarantee a rate cut in the event of a slowing economy or drooping stock prices, is no more.

Tales of woe from the housing market are too well known to need extensive repeating: Sales and prices are down, inventories are up, and construction continues to fall. Business investment is not picking up the slack. With the service sector booming, unemployment low, and consumers still willing to shore up the economy, that doesn't add up to the recession that has Greenspan worried, but it does add up to a slowdown. "Growth . . . looks likely to drop close to 1 percent in the first half of this year," according to John Makin, economist at the American Enterprise Institute.

Until now, America has been the locomotive pulling a good part of the world economy along. Question: Will the world's economies now return the favor and prevent a growth slowdown from morphing into a recession? In answering that question it is important to keep in mind the enormous distance between the American economy and the others in the top ten. The American economy is almost three times as large as that of second place Japan, and twelve times the size of the tenth largest, Canada. So it will take a lot of little engines that could to make up for a slowing, never mind a slumping, U.S. economy.

Japan might make up some of the slack. Its economy grew at an annual rate of 4.8 percent in the last quarter of 2006, following a weak third quarter, and with private consumption relatively strong, seems sufficiently on track for the Bank of Japan to have raised interest rates a bit. Takehiko Nakao, Minister of the Finance Section of Japan's U.S. embassy paints a rosy picture: excess production capacity has been mopped up, employers are in a mood to hire, and "excess debt and loans are . . . now in the past." Deregulatory and legal reforms of the so-called lost decade of the 1990s have laid the basis for continued growth, he told a meeting of the National Economists Club in Washington last month. Citigroup agrees: Its latest advisory concludes, "Japan's expansion looks somewhat better balanced, as consumption appears to be catching up to income growth, while expansion continues to expand."

Germany's economy, the world's third largest, also seems to be awakening from a rather long nap. Business confidence is close to its historic high, employment is up and unemployment is down, and, according to Citigroup, "upbeat companies' employment plans suggest that the cyclical recovery in the labor market is still under way." The overall unemployment rate obscures the huge difference between the west (8.1 percent) and the east (stuck at 16.5 percent thanks to the overvaluation of the east's currency at the time of reunification). Thanks to a bit of rather quietly executed labor-market reforms negotiated with the trade unions, fearful of further capital and job flight, labor costs are returning to competitive levels. Equally important, there seems to be a dawning, if grudging, realization by voters that the country must reform its overly-generous welfare system in order to increase incentives to work and decrease incentives to stay on the dole. At least, that's the impression I had on my recent trip to Germany.

Which brings us to Britain as we work our way down the list of largest economies. Whether because of chancellor of the Exchequer Gordon Brown's superior economic management, or the foundations for prosperity put in place by Margaret Thatcher, or because world trends--skilled immigrants, cheap Chinese goods, a buoyant America--have worked in Britain's favor, it has racked up a decade of solid growth. Rising interest rates and a tightening fiscal stance might cool that growth in the near-term, but only a bit. The service sector continues to grow, London claims a larger and larger share of the lucrative financial services market, and sales of do-it-yourself and household goods this month are so strong that inventories are being depleted and restocking is underway.