PEOPLE around the world often wonder what drives us Americans and particularly our policymakers.
Here’s an economy afflicted with a huge twin deficit; nearly 4 per cent of GDP on the government’s books and pushing 5 per cent of GDP in its current account with the rest of the world. Yet, its policymakers just made the government deficit wider by passing a large tax cut and its monetary authorities cut interest rates! Worse, the markets crashed with disappointment when the Federal Reserve only cut rates ¼ per cent instead of ½ per cent. In classic US slang, “what gives?”
To better understand us, you might choose to reread the classic children’s book The Little Engine That Could. The little engine was pulling a long and heavy freight train and was about to approach a very steep hill. Many doubted the little engine’s abilities. But, it huffed and puffed “I think I can, I think I can” over and over and, since all children’s classics work out, the little engine makes the hill! Chalk it up to early indoctrination into the American can-do spirit.
Some in America now claim that our economic problems are really all psychological. We should get over our pessimism and, if we all collectively chant, “I think I can”, we will spontaneously begin a new golden era of growth. As an economist, I don’t care to debase analysis of our economy to pop psychology, but the train metaphor works quite well. The modern economy doesn’t run on wishful thinking, but has an engine powered by sound monetary, fiscal, and regulatory policies.
For quite a while America has been the engine of global growth. The US economy has accounted for roughly three fifths of all global growth in the past five years. But right now, that doesn’t seem to be enough. Balance sheet problems and global excess capacity in a number of industries mean that pricing power is weak and profit margins are slim. Corporate fixed investment, necessary to create a self-sustaining global recovery, is not taking off in this environment.
The train, the World Economy Express, must climb uphill against these structural problems. To do so, it must create enough of a head of steam on the demand side to overcome capacity and pricing problems and get investment growing again. Once the train surmounts these obstacles, it’s all downhill from there.
The cars the engine is pulling are heavy. Most of the cars are just dead weight. One, from the Japanese National Railway, has had its wheels freeze up despite the application of generous amounts of grease. Another group of cars, provided by Eurail, contain some passengers actively pulling on the emergency brake as the train approaches the hill.
The engineer is facing a dwindling supply of coal. There are not many chunks of monetary policy left. The last injections of potent fiscal fuel are about to enter the boiler. And foreign exchange markets may have thrown in all they have, at least for now. Some of the passengers, particularly the ones pulling on the brakes, are grumbling about the imprudence of the engineer in using so much fuel.
Before he left the station, the engineer had a talk with two colleagues who were the last who attempted the hill; both failed. One, from the Japanese National Railway told his story, and the conclusion was that they didn’t throw enough fuel into the engine quickly enough. Worse, that train was only pulling a few cars from the region. Much more may be needed this time.
The other, a grizzled old timer was a youngster on the train 70 years ago. His memory zeroes in on what happened when the engine failed to make the hill. Once things start sliding backward, panic breaks out. Passengers begin fights in the scramble to save themselves. The whole train crashes at the bottom of the hill with many casualties. What follows is wholesale riots and lynch mobs hanging anyone they imagine is responsible.
The engineer has read stories about that episode. He doesn’t need to be convinced that failing to make the hill will produce a real disaster, for which he will be blamed. Some of his passengers are already cussing loudly about the make-up of the train. Globalisation, pulling cars from all over the world on a single train, is blamed by some. Others blame the high-efficiency engine of Anglo-Saxon capitalism, as if a less-efficient model would do the task at hand. Still others say the lead engineer is a stupid cowboy who is out to wreck the train and should be tried for his reckless criminality. When the engineer tells these people to at least get their hands off the emergency brake, they complain that he is acting like a bully.
The computer models at company headquarters all said there was nothing to worry about, there was plenty of power already in the engine. But, the same computer models said exactly the same thing on previous attempts in 2001 and 2002. Back in 1998, 1999, and 2000, the computers were saying that there was no hill ahead. The one thing the engineer is not worried about is his brakes. Should he make the hill, they’ll be able to slow down, although he knows that the brakes are going to have to be tapped gently. Slamming them on could derail the train.
In this context, the decision is easy. Failure to make the hill will mean an accelerating downward rush to the valley below, destruction of the train, and widespread injury and death. One can debate exactly when to add the last few lumps of coal. But, in the end the engineering team is going to put every last bit of fuel into the engine. Moreover, they are already ordering the conductors to prepare for possibly tearing up the seat cushions and dining car tables to throw onto the fire if need be.
There are no guarantees that this engine is going to make the hill. But the engineering staff knows that there is no such thing as managing a “graceful decline” back into the valley below. For the sake of all aboard the train, we should be glad that the engineers didn’t spend much time studying existentialist philosophy or any of the nihilist thinkers. Abstract expressionism may be in vogue in the salon car, but not among the folks running the train. They were raised in the can-do spirit of The Little Engine That Could.
- Larry Lindsey, former assistant to President Bush for economic policy, left the White House in December 2002.
