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When Doing Nothing Is Healthier Than What Deficit-Doctors Order

February 14, 1988|Charles R. Morris | Charles R. Morris, author of "The Cost of Good Intentions" (McGraw-Hill), an analysis of the New York fiscal crisis, is writing a book about the arms race.

NEW YORK — It's time someone put in a good word for political paralysis. More than a dozen presidential candidates are plying their peculiar trade, grinding out position statements, seeking the mandate to sally forth against a sea of real or imagined economic dangers--America's international debt crisis, the trade crisis, the deficit crisis, the currency crisis, the industrial crisis. At the same time, the team surrounding the outgoing occupant of the White House occasionally makes noises about taking some decisive action in the name of the President's "legacy."

There is no question that the world's economic system is on the threshold of a major restructuring. The global financial arrangements worked out in the aftermath of World War II were based on the assumption that the United States was so much richer than anywhere else it could act as the world's banker, broker, paymaster, financial disciplinarian, supplier of industrial goods and military protector--all at the same time.

That is clearly not true anymore and it is nonsensical to portray America's trade deficit an unalloyed "good," as President Reagan and supply-side guru George Gilder have recently argued. But the crisis-mongers have a grip on reality every bit as precarious. When the choice is between paralysis and ignorant flailing in the dark, the charms of torpor take on considerable appeal.

Consider the "crisis" of America's external debt. From being a net creditor to the rest of the world, according to the Commerce Department, America's external balances swung in just a few years to a net deficit of $265 billion by the end of 1986, making the United States the biggest national debtor in the world and prompting panicky rhetoric about the United States "standing tall while on bended knee."

But as the Commerce Department admits in its own fine print, there is no net external deficit; the scary numbers are largely accounting conventions. American corporate assets overseas, mostly acquired in the 1960s and 1970s, for example, are valued at their purchase price, not at their current market value, which is silly. In 1986, the United States enjoyed a small net inflow of interest and dividends of $20.8 billion from foreign assets, which is a more precise indication of a creditor or debtor position; inflows and outflows were still roughly in balance at the end of 1987.

The word "debt" in this context also means something different from what the ordinary person understands by the term. Any asset in America held by a foreigner is considered an American "debt," whether it's an apartment in Manhattan or a Nissan plant in Tennessee. The globalizing of capital flows is also a key factor. Bankers have worked hard to gather foreign bank deposits and sell Eurobonds and "Euro-equities," but they all go into the Commerce Department's "debt" column. Clearly there has been a major reordering of world asset holdings, with unquestionably profound political and financial implications. But it's far from clear that this constitutes a "crisis," or that emergency measures of any form are called for.

The trade deficit is surrounded with similar puzzlements. West Germany, for example, is often held up as an economic paragon for building huge external surpluses throughout the 1980s. But West Germany's trade success has been bought at the price of a nearly non-existent growth rate for the entire decade and a 9% rate of unemployment, about four times higher than its postwar average. Whether that is the path of wisdom is at best arguable.

The whole concept of a trade balance shifts meaning in subtle ways with the rise of the supranational company, led by U.S. giants like Ford and IBM. The fact that Ford is the most important European car manufacturer doesn't show up in the trade statistics because its cars are made in Europe. Japan is "fixing" its car-making surplus with America by moving auto factories here. The typical American car part shows up in the trade statistics about three different times--perhaps as an import if the raw material is purchased overseas, then as an export when the components are sent overseas for fabrication and assembly, and again as an import when the finished component is returned for final assembly here.

Politicians still prattle about the manufacturing "crisis" in terms of a "rust bowl" wasteland. In fact, manufacturing's contribution to the gross national product--about 23%--has not changed at all during the entire postwar period and is as high now as it ever was. Manufacturing productivity has risen at about a 3.5% rate throughout the 1980s, the best record in history.

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