Amity Shlaes panics

Mark Jones jones118 at
Tue Jun 19 02:23:48 MDT 2001

FT: Five reasons for gloom about global growth
Policies adopted by governments are doing more to exacerbate than to remedy
current economic difficulties
Published: June 18 2001 18:59GMT | Last Updated: June 18 2001 19:05GMT

Amity Shlaes

The growing prospect of a global slowdown will be the story of coming weeks.

But what sort of story? Many of the financial media are treating the
downturn as a pure fable of markets, company earnings and business
personalities. On Friday, for example, as the Nasdaq completed its worst
week so far this year, American press and television commentators
concentrated on delivering post-mortems of Nortel's job losses and on
assailing General Electric's chairman Jack Welch for failing to build
rapport with the European Commission.

On the surface, this focus on the tickertape may seem to make sense.
Internet stock prices were too high. Company forecasts and profits do
underlie market movements. But underlying those forecasts and profit reports
there is another, even more important force. It is policy, as promulgated by

Every time governments change policies, they also reset the curve of global
growth, if only by an increment. "Markets are mirrors of policy and not the
other way around," says Brian Wesbury, an economist with Chicago-based
Griffin, Kubik, Stephens and Thompson.

And there is a strong case to be made that the past month has delivered some
very damaging policy news. The case is a free market one: anything that gets
in the way of growth is deemed to be negative. Not everyone will agree with
it. Still, if growth is our paramount goal, we can count at least five
policy events that spell trouble, no matter how unrelated they appear.

Start with the street protests over President George W.Bush's opposition to
the Kyoto treaty. These seemed, in the US perception, to ratify European
leaders' disapproval of the Bush opposition. Overall, it is becoming
increasingly clear that both sides must gird up for lengthy battles and
that, in turn, some form of co-ordinated regulation on greenhouse gas
emissions that includes the US is likely be forthcoming. Since everyone from
European Union authorities to Japanese carmakers believes such global
regulation will slow the growth of companies and economies, this is bad

The second cloud on the horizon is the decision by European commissioner
Mario Monti to block the giant GE and Honeywell merger. When it became clear
that the marriage would not win Mr Monti's blessing, US television focused
on damage to Honeywell's stock price and its "ripple effect". But last
week's GE-related equities downturns were not merely about "markets catching
a cold". Even if we allow that Mr Monti's action in this instance is one
that promotes efficiency, the precedent he set will disturb those who had
viewed Europe as a new growth frontier. Mr Monti is signalling that unified
Europe will use its gatekeeping power aggressively - even more aggressively
than US antitrust authorities.

In other words, in the new global economy there will be more second-guessing
when companies seek to rationalise, rather than less. This is especially bad
news during a downturn, when companies need extra leeway to navigate, not
extra regulation.

The third blow was the recent UK election. Coverage of this story has
focused on the Labour landslide, or the boost it gave to the political
future of certain competitors of William Hague, the outgoing Conservative
leader. Pundits across the political spectrum insist the election was not a
referendum on economics.

But these observers missed two facts. The first was that neither party put
forward a coherent plan to boost the UK's relative competitiveness. UK prime
minister Mr Tony Blair and Gordon Brown, his chancellor of the exchequer,
yesterday rushed to rectify this with a "competitiveness programme" that
included a valuable plan to slash the tax on capital gains.

But the victory of pro-Labour Europe increases the likelihood that
relatively free-market Britain will allow itself to be absorbed by a less
freedom-oriented continent. The fact that sterling did not jump for joy
yesterday at Mr Blair's good news showed how markets remained concerned
about the Europe factor.

Fourth in the gloomy landscape is the disappointment of Junichiro Koizumi,
Japan's new prime minister. Mr Koizumi was a relatively unknown quantity at
election time - hence the early obsessive attention to his coiffure. But
observers hoped he would back monetary or fiscal shock therapy for Japan's
paralysed economy. But it has become clear that Mr Koizumi will merely
deliver more of the same old austerity. The key, he has even said, "will be
whether the government can persuade the public to bear the pain". He may
still surprise the world and rescue Japan but his behaviour to date suggests
to free marketeers that the likelihood that Japan will stall the global
growth engine has increased.

The fifth cloud in the sky is the changeover in the US Senate. It cost the
Bush administration 1½ years (the period before the next congressional
election) in which it might have energetically pursued pro-growth measures.
With a Democratic Senate, the Bush team is forced to make anti-growth
concessions such as its recent decision to seek protection for steel

Not everyone, not even all the free marketeers, would agree on my five
points. One could also make my argument from the left, where the goal,
instead of growth, might be social equity or environmental regulation. From
that vantage point, things have just become rosier.

The point here, though, is that neither side is absorbing the policy lesson.
Thus far, Congress's sole response to the downturn has been to hold hearings
bashing technology stock analysts, as if spanking the industry will push
internet stock prices back up. While these bulls failed us, we also failed
ourselves. In economics, as in life, you find wisdom only if you look for

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