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Jewish World Review June 20, 2001 / 30 Sivan, 5761

Amity Shlaes

Amity Shlaes
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Five reasons for gloom about global growth

Policies adopted by governments are doing more to exacerbate than to remedy current economic difficulties -- 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 governments.

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 news.

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 11/2 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 producers.

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 it.

JWR contributor Amity Shlaes is a columnist for Financial Times . Her latest book is The Greedy Hand: How Taxes Drive Americans Crazy and What to Do About It. Send your comments by clicking here.


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© 2001, Financial Times