NEW YORK — British Prime Minister Margaret Thatcher's Chancellor of the Exchequer and the president of the Common Market had some hostile words for U.S. Treasury Secretary James A. Baker III at the May meeting of the Organization for International Economic Cooperation and Development. They want something very like a recession in the United States, and they want it soon. Domestic demand in the United States is growing at a projected 1.5% this year--sharply down from 1987--but, for the Europeans, this is too much and too fast.
The Europeans politely did not mention what U.S. rate of growth they believe would be appropriate, but a look at some of their economic statistics might help us see what they mean. U.S. unemployment now stands at 5.6%, close to the lowest in 14 years but still far above the level of the 1950s and 1960s, when unemployment rarely rose above 5%. In Europe, meanwhile, unemployment ranges from 20% in Spain to 8.9% in Germany, with most countries posting double-digit rates.
Essentially the Europeans are saying if they can accept double-digit unemployment rates as a permanent feature of national life, why can't we? If they can live with declining rates of economic growth, why can't the United States?
The European bankers, who generally hope for a Republican victory in November, are only hinting about this now, but more will come after the election: They will do their best to force U.S. interest rates up and growth down.
Baker wisely and correctly affirmed the U.S. commitment to economic growth, not simply because he believes that the election of his old friend and longtime political associate George Bush depends on postponing any recession until after November. U.S. officials understand, even if Europeans don't, that economic growth around the world depends on an improved performance among the advanced industrial economies. With Mexico on our southern frontier, and with global security concerns in the Third World, U.S. officials must always be conscious of the desperate need of other countries to grow, lest their population growth combine with economic stagnation to produce a great and costly outburst.
There are other reasons why the United States remains committed to growth. Europe and Japan are primarily makers of manufactured goods. Americans are among the world's leading producers of raw materials and agricultural commodities--as well as makers of manufactured goods. In the 1980s, slow world growth led to a slump in prices for raw materials from oil to wheat. The result for Europe and Japan was a dramatic improvement in the terms of trade; prices for goods they import have fallen, while prices for their exports have remained stable. A return to more rapid global growth would mean that prices for raw materials would rise, and the Europeans and Japanese think this would be a terrible thing. In the 1970s, when raw material prices were high, Japan ran balance-of-trade deficits.
Thanks to the unbalanced policies of the last eight years, the United States has become a debtor nation for the first time since World War I. Like all debtors, we stand to benefit from inflation that would allow us to pay debts with dollars that have fallen in value. Our creditors have other interests: Stable prices, even at the cost of slower world growth, will maintain the value of their U.S. bond portfolios.
For all its economic shortcomings, the Reagan Administration has remained committed to growth since the 1982 recession--in part because, like U.S. administrations of both parties, it knows that nothing irks voters as much as a recession. Unfortunately, growth will be more difficult in the next six years than it has been since 1982. The natural alternation between expansion and recession that marks the business cycle is almost certain to produce a recession soon. Beyond that, the United States, as a debtor nation, has lost some of its ability to generate global growth. If we try to stimulate our economy through deficit spending, we must turn to skeptical foreign bankers and bondholders for money to borrow. They are unlikely to provide us with money at low rates of interest, convinced as they are that we are determined to inflate.
Thus for all Baker's brave words in Paris, the United States may be forced to accept a slower rate of growth than it wants or needs. In some ways, we risk returning to the situation of the late 19th Century, the last time we were a major international debtor, when U.S. governments were frequently forced to raise interest rates and undergo recession to satisfy British bondholders.