Today the conventional wisdom is that the American economy
is by a wide margin the most successful economy of the industrial
core. A business cycle expansion of extraordinary length, the
lowest unemployment rate of any major industrial economy, no
visible problems with inflation, relatively rapid productivity
growth, high stock market values, and technological dominance
of the most vibrant and rapidly-growing sectors of the economy.
Once again the United States is--as Leon Trotsky wrote more than
seventy years ago--"the furnace where the future is being
forged" that is showing other economies an image of their
likely future. Governing bureaucrats, politicians, business executives,
and intellectuals are pondering how they can at lowest costs
adopt and adapt the key economic institutions that underpin the
past decade's triumph of the American economy.
But little more than a decade ago things were very different.
About fifteen years ago there was a joke making the rounds, about
three executives--American, European, and Japanese--about to
be executed by terrorists and their last requests. The last request
of the Japanese executive was to give a lecture on Japanese management
techniques. The punchline of the joke was the last request of
the American executive: to be executed immediately so as not
to have to listen to another lecture about Japanese management
techniques.
Fifteen years ago the "triumphalism" was Japanese
economic triumphalism. Observers (including me) looked at Japan's
extraordinary rate of investment, the high rates of return on
investment in Japan to that date, the extraordinary competences
of Japan's export manufacturing sector, and projected those trends
forward. They--we--saw the extraordinary productivity of export
manufacturing diffusing through the rest of the Japanese economy,
and saw the leading edge of the Japanese economy gaining the
same productivity edge in processors design, software, networks,
and other highest-tech industries that they had earlier gained
in industries like consumer electronics, metallurgy, and automobiles.
Social solidarity, long-term loyalty, patient capital, a successful
developmental state--these seemed to be powerful virtues worth
imitating by all.
Today, however, the arms of the Japanese developmental state--MITI
and MOF--are seen as having been unequal to their tasks, and
unable to grasp the sitation of Japan in the 1990s. Long-term
loyalty is seen as a lack of entrepreneurship. Patient capital
is seen as a failure to respond to market signals. Social solidarity
is seen as blocking the economic reforms that would bring the
non-export manufacturing sectors of the Japanese economy up to
a first-world standard of productivity.
The pendulum has swung remarkably far away from Japan in the
past decade. But before this most recent swing, businesses and
governments learned from Japan's economic miracle. The lessons
about quality control and productive efficiency taught by Japanese
manufacturing firms were painful ones, but the Fords and the
Siemenses and the Hewlett-Packards learned.
And the pendulum will swing back, away from the United States
economy.
The most likely way that the pendulum will swing back is through
a decline--either rapid and short or slow and prolonged--in American
stock market valuations and in the value of the dollar. Claims
that current American stock market values are sustainable rest
on a belief that attitudes toward risk have changed and that
the marginal investor in the stock market now expects a Treasury
bond-style rate of return from equities. But no one holding Cisco
or Yahoo today does so because they anticipate that they will
receive a Treasury bond-style rate of return from their investment.
Substantial portfolio losses on American equities will make decision-makers
all over the world allergic to praise of the American economy.
An end to the net inflow of capital to America and a consequent
substantial fall in the value of the dollar would substantially
reduce the international purchasing power of American investors
and companies, and lower their relative weight in the world economy.
Such a decline in the dollar value of American equities and
in the international value of the dollar would not have to greatly
disturb the fundamentals of American production and employment.
The Federal Reserve could use its interest-rate tools to shift
investment demand from sectors valuable in times of stock-market
exuberance to sectors like construction where investment is profitable
when interest rates are low, and a decline in the value of the
dollar would eventually generate an export boom. Only if the
Federal Reserve badly misses the mark--or if a substantial decline
in the dollar is accompanied by the revelation that America's
financial institutions have extraordinarily large and unhedged
euro, yen, and sterling liabilities--will the American economy
face problems of the same magnitude that the Japanese economy
faced and has so far failed to surmount as a result of the end
of its bubble economy a decade ago.
But even though an end to the period of irrational stock market
exuberance and a high currency value supported by large-scale
capital inflows will not--or need not--greatly disturb the fundamentals
of American production and employment, it will bring an end to
the willingness and eagerness of politicans and executives in
other countries to learn from America. Cultural patterns and
socio-economic institutions are stubborn things that change only
under substantial pressure. And there is is a sense in which
it would be too bad if the period of American economic triumphalism
came to an end soon. For the lessons that the rest of the world
economy's industrial core should learn from America's relative
economic success in the 1990s have not yet been thoroughly learned,
have not sunk in.
What are these lessons--analogous to the lessons about quality
control, productive efficiency, and manufacturing organization
learned from Japan more than a decade ago--that the rest of the
industrial core should learn? I see four:
First, that governments seeking full employment can ease their
task by providing large subsidies to businesses that hire relatively
unskilled, low-wage workers. The expansion of the Earned Income
Tax Credit--a program that directly boosts the wages of the working
poor by having the government pay a substantial share--in the
United States in the 1990s appears to have been a significant
policy success, paying dividends not just in a lowered unemployment
rate but a less unequal after-tax distribution of income.
Second, that there is more room for expansionary monetary
policy to lower unemployment without raising inflation than anyone
had believed. Economists will squabble for decades over whether
the large reduction in America's natural rate of unemployment
in the 1990s was the result of the end of inflationary psychology,
the coming-of-age of the information technology sector, the growing
experience of the labor force, or all three. But it is clear
that the pattern of inflationary response to even minor monetary
easing that has been feared by central banks since the 1970s
is greatly weakened, or gone altogether.
Third, that in large part because of changing technology there
has been an important shift in the efficient location of new
technological development. The extraordinary economic success
of the venture-startup system of Silicon Valley is not just a
side effect of a stock market bubble, but is the result of a
technology-driven decline in the relative competence of very
large firms at tasks of developing (but not marketing) new technologies
and new products.
Fourth, that it is possible to capture most of the benefits
of large-scale integration and also most of the benefits of fierce
economic competition if businesses are forced--either by the
market or by regulatory authorities--to make their products conform
to standards so that other firms' products work with theirs.
If there is a lesson from the success of America's telecommunications
industries over the past generation, it is that government regulation
by the Federal Communications Commission that required firms
to build products that other firms' products could connect with
was extraordinarily successful. If there is a lesson from the
success of America's personal computer industry, it is that the
market's forcing nearly all hardware and software manufacturers
to make their products first IBM and then Microsoft-compatible--so
that nearly any program would run on nearly any microcomputer--created
extraordinary value. And if there is a lesson from the internet
boom, it is that the common http:// and .html standard open-sourced
by Tim Berners-Lee was overwhelmingly more powerful than the
closed-source proprietary online system architectures of Compuserve,
of Prodigy, of Minitel, or of the original AOL.
Will the rest of the world economy learn these four lessons
before the pendulum swings away, and people elsewhere cease for
a time to look at America for models to imitate? I hope so.
Professor
of Economics J. Bradford DeLong, 601 Evans Hall, #3880