In 1999 I wrote a book that foreshadowed the collapse of America’s New Economy stock boom. I went on to publish a paperback version with a new introduction — an introduction whose prescience has also stood the test of time. This is that introduction as it was published in Unsustainable, the 2003 paperback edition of In Praise of Hard Industries.
This book’s analysis of the future of the American economy is a sombre one — so sombre indeed that when it was first aired in an earlier version in 1999, the reaction of many readers was not so much shock as outrage. In updating the argument for this 2003 edition, I would have liked to have struck a more optimistic note. But in some ways the facts are even more troubling now that they were in 1999.
The case I presented in 1999 was that America’s then ecstatic infatuation with the so-called New Economy (the economy of computer software, the Internet, movie-making, finance, and other “sophisticated” services) was misguided. America, I argued, was squandering vast resources on untried and, in many cases, patently unworthy New Economy businesses. Meanwhile it was utterly mistaken in turning its back on its manufacturing base. I was concerned in particular about the wholesale erosion of America’s advanced manufacturing industries, which had been the font of American prosperity and power in the previous century.
Startling though my critique of the New Economy may have seemed in 1999, events in the interim have done much to vindicate it. Certainly, following the flaming out of so many erstwhile high-flying software and Internet stocks in 2000 and 2001, fewer people today imagine that the New Economy walks on water. But the more important part of my argument — that, in neglecting its advanced manufacturing industries, the United States is courting long-term economic enfeeblement — has yet to prevail in the court of public opinion.
The most dispiriting aspect of the events of the last four years has been the way the American establishment has chosen to ignore the deeper meaning of the stock market debacle. American opinion makers have missed something that will be obvious to future historians — that the absurd overvaluation of New Economy stocks in the late 1990s was no isolated mishap. Rather it was part of a much larger pattern of Am eric an economic self-delusion. Another important manifestation of that self-delusion is the equanimity with which the United States has viewed the decline of its manufacturing industries in recent decades. Like the New Age talk that propelled the dot.com debacle, the American establishment’s indifference to the plight of American manufacturing industries is based on no rigorous analysis. The key commonality between the two cases is an a priori belief that whatever the market dictates is, in all circumstances, unquestionably right.
Caught in the crash, the United States was like a man who, after years of vaguely suspecting that all was not well with his health, suddenly underwent a frightening heart attack. Yet, instead of acting decisively to have his illness properly diagnosed and treated, he chose to deny the devastating significance of his symptoms.
This attitude of denial — even more stubborn than I could have anticipated in 1999 — makes me particularly concerned about the long-term outlook for the American economy. If a 70 percent drop in the NASDAQ market does not shake people’s economic illusions, it is hard to know what will.
Let’s be clear: I have nothing against the New Economy. Not only is it here to stay but, on balance, it is a great force for good. Certainly companies like Amazon.com, eBay, and Yahoo! have ingenious and innovative business models that serve real needs. Indeed I fully expect that in due course at least some of the New Economy stocks will surpass their pre-crash levels. But the New Economy is no panacea; and to the extent that its benefits continue to be overestimated by policymakers and opinion leaders, it distracts attention from America’s fundamental problem, the disastrous decline of America’s once-world beating advanced manufacturing industries.
One thing is certain: few members of the American economic establishment have emerged from the bubble with much credit. As other observers have already sufficiently documented (see in particular John Cassidy’s Dot.con), the bubble unmasked countless Wall Street stock promoters as, at best, quacks. (This would hardly have come as a surprise to anyone who had read the 1999 version of Unsustainable. Although my strictures about Wall Street’s ethics may look unexceptional today, when they were first made in 1999, Wall Street’s apologists in 1999 tried to dismiss them as “overblown.”) Meanwhile those in the press who so uncritically fell for Wall Street’s euphoric talk in the late 1990s revealed themselves as dupes. Yet these same people — the quacks and the dupes — continue for the most part to guide America’s economic course today. And even after the crash they have expended hardly a moment on self-reflection concerning the debacle they helped create in the late 1990s.
Yet painful though it may be for the quacks and the dupes, it is important that they recall — and try to learn from — the inanities of the bubble era. Here are a couple of prime slices of bubble-era lunacy:
* Dubbing itself “the gateway to world cool,” Boo.com was one of the most hyped new companies of the late 1990s — and one of the most absurd. Its 400 employees drew big salaries, travelled in style, and had fresh fruit delivered daily. It lost $185 million in an attempt to position itself as a global online retailer. Still hopelessly unprofitable a year after the stock market crash began, it was shut down in May 2001. Among “smart money” investors who lost heavily were J.P. Morgan and Goldman Sachs.
* Rufus Griscom, co-founder of a minor-league Internet site called Nerve.com, was quoted saying, “It’s incredibly powerful to feel that you are one of seventeen people who really understand the world.” The comment appeared in New York magazine on March 6, 2000. A week later the NASDAQ crash began. To be fair it should be added that Nerve.com survived the crash — but then as it is a sex site, the secret of its business model is one that probably more than seventeen people are privy to.
* Webvan filed to issue an initial public offering in August 1999, just two months after it had begun selling groceries over the Internet. As disclosed in its prospectus, it was expected to lose more than $500 billion in its first three years. Even so, the offering was a huge success and investors valued the business on the first day’s trading at $8 billion. Webvan’s chief financial officer was quoted in Business Week describing the company’s strategy as the “first back-end re-engineering of an entire industry.” Less than two years later Webvan ignominiously closed after spending $1.2 billion on a nationwide distribution network. As recorded by John Cassidy, the Webvan business model had a basic flaw — most people prefer to drive to their local grocery store and pick out their own tomatoes.
Manufacturing: an American blindspot
So much for the absurdities of the late 1990s bubble. But, as I have mentioned, the case for manufacturing is the core of my argument. The decline of American manufacturing has continued apace in the four years since the first edition was published.
I will leave the full explication of the argument until later. But at this stage the important point to note is that most Americans literally do not know what modern manufacturing is. Misled by the American media, they have come to think of manufacturing as merely labor-intensive assembly work — in other words, work that if the American economy were in robust good health, America could happily delegate to low-wage nations like Mexico and China. Those who think of manufacturing as mere final assembly fail to ask some important questions. Who, for instance, makes the high-tech components required in such assembly? And who makes the advanced materials used in such components? Even more to the point, who makes the ma chines — typically highly sophisticated and minutely precise machines — that make such components and such materials? It cannot be emphasized too strongly that assembly is not serious manufacturing. It is merely the last stage in a long series of manufacturing processes. And it is in the earlier processes that serious manufacturing is done. Such manufacturing — advanced manufacturing — is the very antithesis of the low-wage assembly work of the American media stereotype. For a start it is typically both far more capital-intensive and — surprising as it may seem — far more knowhow-intensive than most areas of the New Economy. As such it scores over the New Economy in several crucial ways: it creates a wider range of jobs than the New Economy and, measured by the level of worker skills and capabilities required, higher wages. Manufacturers moreover typically export more than ten times as large a share of their total output as service companies.
This last point is particularly topical. For, virtually unnoticed by the American media, America’s trade position has deteriorated to the point where disaster is now staring policymakers in the face. After decades of competing in an utterly unfair world trading system — outrageously mo re unfair than mo st of the American media have understood — many American manufacturing industries have dwindled almost to nothing. And the result is that imports have been flooding in, even in years when the American economy has stagnated. As of 20 02 the American current account deficit had reached a record $503 billion, a rise of 28 percent on 2001. Even more shockingly, it represented nearly ten times the deficit of a decade earlier and was an increase of 138 percent on the $221 billion recorded in 1998, the last full year before the original version of this book went to press.
One reason all this is not better understood is that it has been hidden by the trend towards outsourcing. Many advanced American manufacturing industries — the sort that have traditionally leveraged their productivity with large amounts of sophisticated production know-how and advanced equipment — still exist in name but they have become deeply hollowed out by better financed European and East Asian rivals. By far the biggest winner from the trend has been Japan. Despite an image as an economic basket case, Japan has now passed the United States in total manufacturing output — and has done so with a workforce less than half of America’s. Even more startlingly, Japan’s output of advanced manufactured products — high-tech components, key materials, and sophisticated production equipment — is now estimated to exceed that of the United States by a factor of at least five. Moreover, although Japan’s manufacturing success continues to be attributed to low wages, wages in Japan are now actually higher than in the United States.
How can these facts be reconciled with the press’s suggestions that the Japanese economy suffered a disastrous “lost decade” in the 1990s? They can’t, of course. Not for the first time, the press has gotten the Japan story completely wrong. And — again not for the first time — the problem has been in the press’s choice of sources. Just as the press was persuaded by dubious sources to overestimate America’s strengths in the 1990s, equally dubious sources led it to underestimate Japan’s. It is, of course, true that Japan suffered major financial problems in the early 1990s in the wake of the implosion of Japanese real estate and stock prices. But as I was almost alone among Tokyo-based observers in the late 1980s in predicting Japan’s financial crash (see the notes at the end for further elaboration), I can claim to understand that crash better than those who did not predict it. We will have more to say about the Japanese financial crash later. For now, let’s note that the problems in Japan’s financial sector have done little if anything to hold back the basic engine of Japanese prosperity, Japan’s super-strong manufacturing sector.
The trade crisis in perspective
Given that the United States has now incurred large and generally rising current account deficits for two decades, even America’s most serenely detached ivory-tower economists are becoming alarmed. This emerged clearly from a poll I conducted in 2000. In a project undertaken for the Boston-based magazine The American Prospect, I contacted the ten American-born economists who had most recently received the Nobel Prize to ask whether the cur rent account deficits were too high. As most of these economists were strong believers in free markets, they might have been expected to see no problem. After all, given their commitment to doctrinaire laissez-faire theory, they could readily have explained away the deficits as simply an expression of the market’s unfathomable and supposedly infallible wisdom. In reality only one of the Laureates was prepared to offer such an unqualified endorsement. The others either voiced misgivings about the trend or embarrassedly refused to comment.
In truth there is much to be alarmed about. The 2002 deficit represented fully 4.7 percent of America’s gross domestic product. This ranked as America’s largest percentage trade gap since records began in the 1880s. It stood in particularly stark contrast to America’s days of greatest relative economic success in the first seven decades of the twentieth century. That w as a period when thanks mainly to the extraordinary exporting prowess of America’s then huge manufacturing industries, America showed a trade surplus in all but eleven years — and did so despite the fact that American wages were then five to ten times higher than those of nations like Japan and Germany.
Even America’s notorious trade crisis of the early 1970s seems insignificant by recent standards. The current account deficit represented just 0.1 percent of GDP in 1971 and 0.5 percent in 1972. Yet it was the prospect of the 1972 deficit – considered such a disgrace for the United States at the time – that forced President Nixon to break the dollar’s traditional and semi-sacred link with gold.
Not only is that 4.7 percent 2002 deficit unprecedented in American economic history but it is shocking by all previous world standards. As I have shown in an article at my website (www.unsustainable.org), other major nations have incurred percentage deficits comparable to recent U.S. levels only at times of extreme economic distress, such as during the two World Wars or in the immediate aftermath of those wars. The nations whose records I studied were Canada, France, Germany, Italy, Japan, and the United Kingdom. Full disclosure: as current account numbers do not exist for several of these nations in earlier periods, the analysis by default relied on records for visible trade. This, however, is not a significant qualification as invisible trade was negligible at the relevant times — and the visible trade numbers are believed to approximate closely the current account experience.
America’s pattern of worsening trade balances correlates closely with declining manufacturing employment. As the Washington-based economist Pat Choate has pointed out, the United States lost more than 4 million labor-intensive manufacturing jobs in the ten years to June 2003. Of these, more than half disappeared in just the last 30 months of the period.
The result is that manufacturing’s share of total employment had fallen to 10.7 percent by 2003 — versus 18.2 percent in 1989 and 33.1 percent in 1950.
Manufacturing’s falling share in total employment in turn correlates closely with a pattern of stagnant middle class income growth. The most obvious indication of how badly the American middle class has done in recent years is that these days most families need two incomes – that of a mother as well as a father – to maintain the sort of lifestyle that fathers alone could deliver a generation ago. As recorded by Alan Tonelson in Race to the Bottom, Bureau of Labor Statistics data show that over the last 40 years, two-earner families have moved from being the exception to being the norm in American life. In 1960, fewer than 27 percent of all married women living with their husbands worked. By 2000, the figure had risen to 6 2 percent. Forty years ago, moreover, only 19 percent of such women with children under six years of age worked. By 2000, this share was 63 per cent.
Selling the family silver
If the immediate problems associated with the decline of manufacturing are troubling, the consequences for America’s long-term future are positively frightening. Because its manufacturing base has shrunk so drastically, the American nation is like a household whose income can no longer keep up with its spending. To pay the bills, it must either run up credit or sell the family silver. Neither option is attractive. Loans must be repaid in the end and in the meantime interest mounts up. As for selling the family silver, one can do that only once. Thus one can live beyond one’s means for a while but eventually there is a reckoning. And the longer the reckoning is avoided, the more painful it is likely to be when it finally comes.
The same logic applies to nations. It is a fundamental fact of economic life that every dollar a nation incurs in current account deficits must be funded by a dollar of foreign finance. In the case of the U.S. trade deficits, much of the foreign funding comes in the guise of foreigners buying U.S. Treasury bonds. Some comes from foreign banks lending to American counterparts. And mu ch of the rest comes from foreigners buying American real estate and equities.
In an increasingly troubling trend that has its roots in the trade imbalances, foreigners are even buying some of America’s largest corporations outright. In effect the United States is selling the family silver. Within the space of a single generation it is presiding over the disposal of much of its industrial and commercial base. This base, need it be added, required the enterprise of many earlier generations of Americans to build.
Such erstwhile pillars of American industry as Amoco and Chrysler have been bought by foreigners. In 2002 Lucent, heir to the fabled technological riches of Bell Labs, sold its optical fiber business to Furukawa of Japan. Meanwhile IBM announced the sale of its disk drive business, a crucial high-tech operation that has played a historic role in the development of the global computer industry. Again the buyer was Japanese, in this case Hitachi.
Large parts of Wall Street have also come under foreign control. Names like Scudder Investments, Bankers Trust, First Boston, Alliance Capital, Republic Bank, Kemper Corporation, Alex Brown, and Dillon Read may still sound American but these former pillars of the American financial establishment are now controlled from places like Zurich, Frankfurt, Paris, and London.
LexisNexis, long America’s best known news database, is foreign-owned and its only major rival Factiva is is 50 percent foreign-owned. Even the American book publishing industry is now largely foreign owned. On one estimate, German companies alone now ac count for more than half the industry. American publishers that are now German-owned include Random House, St. Martin’s Press, Doubleday, Crown, and Farrar, Straus & Giroux. Even President Bill Clinton’s memoirs are to be published by a foreign owned publisher – the Knopf imprint of Random House (Random House was taken over by the German Bertelsmann group in 1998).
Already the United States has sold so much of its asset base that its economic standing on the world stage has been significantly undermined. While this may not be obvious to the American public, it is shockingly clear in national asset/liability figures compiled by the International Monetary Fund. These show that between 1989 and 2000, America’s net foreign liabilities ballooned from $4 7 billion to $2,187 billion. By comparison, experience of Japan, the supposed basket case of the world economy, was entirely the opposite. In contrast with the United States, it has long enjoyed a positive net financial balance with the rest of the world and its net foreign assets at $1.16 billion as of 2000 represented an ear quadrupling since 1989.
Perhaps the most alarming news of all is that America’s problem of foreign indebtedness is now feeding on itself. In the words of the prominent British fund manager and financial commentator Marshall Auerback, America has entered a banana republic-style “debt trap.” The nub of the problem is in the vast and ever rising flow of dividends and interest payments that the United States must now remit abroad to foreign owners of American asset s. This problem has been significantly exacerbated by the expenses of the 2003 Iraq war, which will be borne in almost their entirety by the United States (this is in sharp contrast with the Gulf war of 1991, which was largely financed by America’s allies). In a paper published in June 2003 by Chalmers Johnson’s Japan Policy Research Institute, Auerback sketched out this truly alarming prognosis:
If the U.S. did not have to borrow to pay interest on its debt, the ratio of the trade deficit to GDP would likely remain manageable. Unfortunately, the U.S. is a country with a trade deficit and must also borrow [abroad] to pay the interest on its debt. Because the interest rate on that debt exceeds the U.S.’s growth rate, the compounding of capitalized interest payments alone will tend to raise the nation’s relative indebtedness….I expect that the chronic U.S. current account deficit and mounting external debt will ultimately raise long term U.S. interest rates. And this, in turn will speed up the compounding of the interest due on the U.S. external debt and will make the debt trap dynamics even more vicious. At that point, what author Charles Kindleberger calls a “credit revulsion” might ensue, producing a catastrophic outcome for the U.S. economy.
Auerback is not alone in fearing the worst. Even the U.S. government’s own Trade Deficit Review Commission has strongly hinted that America’s current account imbalances are spiralling out of control. In an unusually outspoken report in November 2000, it suggested that, even assuming the trade deficit did not deteriorate further, the current account deficit could reach 7.5 percent of GDP by 2010. Implicit in the commission’s devastating analysis, whose publication was discreetly timed to coincide with the interregnum period after the Presidential election, was that the increase would be driven by rising debt service costs as America’s foreign debt was likely to reach nearly 60 percent of annual GDP in 2010, versus a mere 16 percent in 2000.
By all accounts the outlook has worsened since 2000. As of the summer of 2003, Washington-based Pat Choate was predicting that, absent drastic policy changes, America’s current account deficit could reach 8 percent of GDP before the end of the decade.
Just how alarming this figure would be is clear from a glance at financial history. An analysis of the official records of the Group of Seven nations shows that the only occasion when a major nation has incurred a deficit of comparable size was in 1924. On that occasion the nation in question was Italy and its deficit represented 7.7 percent of GDP. This is hardly a record the United States would want to surpass. After all Italy’s economic problems in 1924 were so intractable that they paved the way for Mussolini to seize dictatorial powers in January 1925.
In truth, on unchanged policies, the United States is headed for disaster — though probably the ultimate outcome will be closer to the fate of the Ottoman empire than to that of Mussolini’s Italy. Certainly, like the Ottoman empire in its last decades, America is becoming more and more beholden to a few major capital-exporting nations. The most important of these are Japan and China. As both these nations closely regulate their financial institutions, this means that unaccountable bureaucrats in Tokyo and Beijing will increasingly function as the ultimate bankers to a financially distressed United States. The consequences for American power — and indeed for Western leadership of the world community — are hard to exaggerate.
The policy challenge: facing a Catch 22
Clearly drastic policy changes are long overdue. Ranged ominously in opposition to effective change, however, are several hugely powerful interest groups. The most notable is the Washington foreign trade lobby. Almost by definition, it can be counted on to oppose any effort to reduce the trade imbalances. Re presenting powerful corporations based in Japan, Germany, France, the Netherlands, and elsewhere, the foreign trade lobby employs some of the most skilled propagandists in Washing ton and has a long record of extraordinary success in quashing earlier American efforts to achieve fair trade.
Another formidable interest group opposed to a sensible trade policy is corporate America. Although in former times many American corporations were prominent in the fight to open foreign markets, now they have crossed over to align themselves with their foreign competitors in the foreign trade lobby. The reason is that they have found they can prof it hugely by outsourcing — in plain English, importing — from certain low-wage nations, and particularly from nations that have deliberately rigged their markets to capture American jobs. The principal case in point is China, which keeps its manufacturing costs ultra-low by (1) suppressing workers’ wages at gunpoint and (b) manipulating currency markets to keep the Chinese currency hugely undervalued. In truth corporate America is now deeply complicit in the rise to world power of a frighteningly authoritarian regime in Beijing. All this represents the ultimate vindication of Lenin’s famous remark that, in competing for short term profit, the capitalists will sell the rope with which the communists will hang them.
In fighting interest group politics on this issue, the American nation should be able to count at least on the solid support of the American press. In reality, however, the American press has long been in the foreign trade lobby’s corner. Increasingly since the mid-1980s, key reporters — particularly elite reporters in Washington who disproportionately shape the press’s economic thinking have embraced the view that America’s trade deficits “don’t matter.” Even the editors of the New York Times seem to have bought into this ultimate inanity. Certainly they no longer seem to think trade is worth the serious coverage it received in the 1970s and 1980s. By the early years of the new century, the Times’s coverage of the monthly trade imbalances had dwindled to almost nothing — even as those imbalances reached levels that just a few years earlier would have been considered unthinkable.
The absurdity of the “trade-deficits-don’t-matter” thesis is discussed at length in a recent paper I published in the economic journal, Challenge. The paper, co-authored with Senator Ernest F. Hollings, pointed out that the thesis had its origins in editorial articles written in the mid-1980s by the Japanese management consultant Kenichi Ohmae. Ohmae and other de facto spokesmen for the foreign trade lobby have skilfully exploited the press’s commitment to an extreme version of laissez-faire. Believing that markets can do no wrong, press commentators have been readily persuaded that even efforts to shield American manufacturers from dumping by foreign rivals are an interference in the market’s “all-seeing wisdom.”
What in practice should the United States do? To many economists, the obvious policy remedy is a drastic devaluation of the dollar. With a lower dollar, the price of America’s exports in foreign markets would fall. Thus American exporters would gain share in these markets and U.S. exports would surge. Perhaps more important American producers would increase their market share at home, as the devaluation forced up the prices of competing imported goods.
Thus at a stroke the current account deficits would be sharply reduced. At least that is the textbook theory. Unfortunately the real world doesn’t work quite like this. While in the long run, the effect of devaluation would undoubtedly be to alleviate the deficits, in the short run it would exacerbate them. This is because, as Pat Choate points out, America no longer makes — and worse no longer is capable of making — many goods essential to the American economy’s daily functioning. Thus in the short run the textbook prediction that devaluation would lead to American manufacturers taking a larger share of the home market is simply invalid. Instead, the United States would have to continue willy-nilly to import and in the wake of devaluation, the dollar-denominated cost of its imports would in crease. Choate’s conclusion is that even a 50 percent devaluation would not significantly cut the current account deficit.
Another obvious policy tool is tariffs. As Pat Buchanan has documented, tariffs enjoy an honoured place in the history of American economic policy. As many Americans will re member, even such a staunch Republican as President Richard Nixon used temporary tariffs, in combination with devaluation, to fight the American trade crisis of 1970-71. What fewer Americans will remember — though it is well worth recalling — is that this formula proved successful in restoring America’s trade to broad balance.
Nonetheless tariffs have gotten a terrible press in recent decades. Indeed in the eyes of the perennially misguided American establishment, they are the economic equivalent of anthrax — a weapon whose deployment is simply inexcusable in any circumstances. Certainly America’s trade partners will be even fiercer in their opposition to tariffs than to devaluation.
As Marshall Auerback points out, United States suffers a special problem because its economy accounts for such a large proportion of world consumption. He comments: “When it [the United States] tries to improve its trade balance through devaluation or through restrictive demand management, its sheer size affect s the economies of its trading partners adversely and to an appreciable degree. Understandably, they object and resist.” In Auerback’s view, foreigners’ resistance will force America to raise interest rates — and this will greatly exacerbate the problem of debt-trap economics.
In essence the United States is caught in a historic Catch 22: on the one hand, far-sighted and austere policies are needed to rectify the deficits, but on the other the American political system seems incapable of seeing beyond the next election. So is all lost? Perhaps not. Some critics of America’s naïve brand of “one-way free trade” sense the political pendulum may at last be swinging their way. This is the view in particular of Alfred E. Eckes, Jr., an Ohio-based historian who in the early 1980s served President Reagan as chairman of the U.S. International Trade Commission. He believes that the recent trend for key American service industries to emulate manufacturing industries by outsourcing work overseas could prove to be the last straw for hard-pressed American voters. This trend, whose rapid rise was predicted in the 1999 version of this book, began creating increasing joblessness in American suburbia in the first years of the new century. And this, Eckes reasons, might finally foster the rise of a grassroots coalition with enough clout to make a real impact on the presidential election of November 2004. “We may be watching a sea change in public attitudes, as people gradually awaken to the fact that free trade is not a free lunch,” said Eckes. “Now that engineers, accountants, Wall Street analysts, and even physicians are facing growing competition from low-paid professional s in India, the Philippines, and potentially China (as English-language skills improve), the articulate professional classes may come to appreciate what blue-collar America discovered in the 1980s.”
Dilemma for the Sphinx
So much for the mood in Peoria. But in view of the massed opposition of the lobbyists and the press, a disgruntled electorate alone will probably not be enough to effect far-sighted changes — at least not in time to avert an Ottoman empire-style denouement. Something more is needed — specifically strong institutional leadership from within the American economic establishment. But where might it come from? One institution in particular comes to mind: the Federal Reserve. Aft er all, the Fed is supposed to look out impartially for the best interests of the American nation. It is expected to be immune to lobbyists and its constitution is carefully designed to keep short-term political pressures at bay (a key part of the Fed’s make-up is that its governors are nominated for a term of fully fourteen years). Thus if any institution enjoys the independence to offer far-sighted leadership it is the Fed, and in particular its famously Sphinx-like chairman Alan Greenspan.
Moreover no American institution comes even close to the Fed in its potential power to influence media coverage of trade. But potential is the operative word. Where trade is concerned, Greenspan and his officials have hitherto been almost entirely silent.
Yet arguably more than any other individual, Greenspan will be held responsible by future generations for the developing disaster. More perhaps than Bill Clinton, more even than George W. Bush (both of whom, let’s be clear, will have plenty to answer for when the history of this crisis is written). In postponing action on an exceptionally thorny issue, Clinton and Bush at least can say they were deterred by the usual short-term political considerations. Greenspan has no such excuse.
Greenspan’s current four-year term is due to expire in the summer of 2004. But in the spring of 2003, at the age of 77, he was appointed by President Bush to a further term of up to four years. Thus on present calculations Greenspan is likely to continue in his job until 2006, or even until 2008. This means he is set to become the longest serving Fed chairman ever, beating the previous 19-year record set in the mid-twentieth century by William McChesney Martin.
In truth Greenspan should have retired long ago. Not only was he already too old when he was last reappointed in 2000 but, even overlooking for a moment his handling of the trade problem, he richly deserves to be put out to grass for his more publicized failures. In particular he has failed to stand up for fiscal commonsense in the face of George W. Bush’s wildly irresponsible budget policy. He was also clearly derelict in his duty in his handling of the late 1990s stock market boom. After expressing early reservations in the mid-1990s, he later embraced the New Economy with the fervor of a true believer. In January 1999 he pronounced the wild technology stock speculation “good” for the capitalist system. As John Cassidy has noted, Greenspan could hardly have done more to promote the boom if he had allowed him self to be photographed buying stock in Amazon.com. Even as late as January 2000 as he was belatedly preparing to raise interest rates, he was praising the “awesome changes ” supposedly being wrought by technology.
Of course, Greenspan’s innumerable admirers suggest that any criticism of his handling of the bubble is mere Monday morning quarterbacking. Not surprisingly this view is prevalent among press commentators who themselves were deeply complicit in pumping up the bubble. In self-defense, they point out that economic history is full of cases of intelligent people being caught up in financial manias. Take the South Sea Bubble, the notorious mania that gripped London in the early eighteenth century. Its many notable victims included even the great physicist Sir Isaac Newton. First, he made a fortune by getting in early and selling well. Then, just before the top, he jumped in again and suffered terrible losses in the subsequent crash.
But if bubbles prove infectious, this does not mean everyone catches the bug. Far from it. In the case of the late 1990s excesses, plenty of sceptics proved immune to the mass hysteria. In the business world, only the most notable cases in point were the virtuoso investors Warren Buffett and Julian Robertson. Others included the textile industrialist Roger Milliken and the press baron Rupert Murdoch. Skeptics in Washington included the economic commentator Pat Choate as well as Senators Ernest F. Hollings and Charles Schumer. Even in the press there were notable sceptics. Examples included James Fallows of The Atlantic Monthly, Allan Sloan of Newsweek, Alan Abelson of Barron‘s, and Jim Grant of Grant’s Interest Rate Observer. In Britain they included the author Robert Heller, as well top editors of the Financial Times.
In truth, given his unrivalled access to confidential information about the world financial system’s workings, Greenspan has less excuse than almost anyone for his bubble era illusions.
As for the future, Greenspan faces a choice. The graceful thing to do would be to admit publicly what must now be becoming obvious to him: that he has consistently underestimated the seriousness of the trade trend. Following such an ad mission, he should resign to make way for a younger, more energetic person to tackle the already nearly intractable trade crisis. By that very act of nobly falling on his sword, Green span would powerfully dramatize the nature of the crisis and thus help galvanize the nation for the inescapably tough measures ahead.
If, by contrast, he hangs on, he may succeed for a few more years in sweeping the crisis under the carpet. But in the absence of drastic policy changes, the truth will out sooner or later, probably in the form of an uncontrollable crash in the dollar’s value.
By making a graceful exit now, Greenspan can hope to be remembered for his intellectual courage in admitting his mistakes. Certainly he will salvage much of the enormous respect with which he has long been viewed by the American public. On the other hand, if he hangs on, the result in the end will be certain obloquy. He will be fated to be remembered as the man who lost America.