A Bang, Not a Whimper

The amazing U.S. economic expansion reached its 106th month in February, making it the longest-running uninterrupted period of growth in U.S. economic history, and setting in motion a debate over who gets credit for this prodigious nine-year-old's parentage.

There is no shortage of candidates, but President Clinton is first on the list. Upon election in 1993, he realized that lower interest rates borne of deficit reduction would prove a longer-lasting tonic than the deficit-expanding spending programs he originally championed. This act of fiscal apostasy was anointed with low interest rates by the expansion's second Titan, Fed Chairman Alan Greenspan, who has since allowed the economy to grow at rates that would have given his predecessors vertigo. And Greenspan has helped provide stability in times of crisis — in Mexico in 1995, Asia in 1997, Russia and Long Term Capital Management in 1998. No wonder John McCain wants to stuff him.

But just as Clinton and Greenspan deserve credit for the economy's success, so, too, do Presidents Carter and Reagan, who deregulated much of the economy, even if the latter's deficits were an unneeded burden. And two others should not go unnoticed: Robert Noyce and Jack Kilby, who separately in 1959 perfected the integrated circuit, from which flowed the microprocessor, the computer, and the Internet, all of which have transformed the economy as much as any economic policy could. To some, giving Clinton-Greenspan credit for the expansion triggered by the information revolution is like giving Moses credit for water flowing from the rock at Hebron: all Moses really had to do was smite the rock, and then stand back and let Providence do its stuff. There's some merit to this view, but absent the stage Clinton and Greenspan set, it's unlikely today's revolution would have proven so robust.

But the debate over the expansion's origins begs a more important question — how will it end? The economy has grown at a muscular four percent for the past four years, but as knowing Wall Streeters say, “trees don't grow to the sky.” Nothing goes on forever. For economies, the limits are set by balance: when economies falter, it is usually because some delicate balance within them has gone out of whack.

In recent memory, this has usually meant wage-price inflation: a tight labor market leads to higher wages, which leads to higher prices, which leads Fed Chairmen less lucky than Alan Greenspan to hobble their patient in order to cure his disease. Some economists — proponents of the “New Economy” — see this pattern as a remembrance of things past. After all, just about every American with an alarm clock and bus fare has a job today, but neither wages nor prices show any convincing sign of acceleration, thanks to galloping productivity gains, for which Noyce and Kilby's progeny deserve much credit. But sooner or later, as the old song says, something's got to give, and labor availability will constrain growth. The good news is that today's more responsive and alert economy might modulate itself without the overshooting that's led to past recessions, which is ultimately the reason why this expansion won't end the way previous ones have.

But there are still other imbalances brewing that could provide the spark that detonates our good thing. One is the astronomical value of stocks today: one hesitates to call it a bubble, since you never really know if something's a bubble until it pops. But were stocks to correct, the pinky-up word for it, the economy would feel a tremor. And not just consumers would be affected: with margin debt — the debt with which high-flying institutional and individual investors buy yet more stocks and other assets — burgeoning, a stock correction would take many of these high-flyers down to earth with a vengeance.

A second possible imbalance exists between the U.S. and the rest of the world, principally Europe and Japan. We're growing, they're not (although Europe, unlike Japan, has a pulse). As a result, we're running massive and escalating trade deficits with them, as we buy their goods and they don't have the means to return the favor. That's fine so long as they're willing to take the dollars they accumulate and invest them back in the U.S., which to date they've been willing to do. But should they lose their taste for U.S. assets, their growing piles of unwanted dollars will become a problem: a rapidly falling dollar usually means higher prices and higher interest rates, undoing two of the forces that have permitted this expansion to reach the outer limits of economic gerontology, and perhaps some financial institutions, again, in the soup.

These are the real risks we face. And notice that they're on the financial side of the economy, not the real side, the side that actually produces goods and services. In the real economy, things take time — inflation gradually creeps up, demand gradually slows down, unemployment gradually rises. If you catch these trends early enough, you can counter them: that's why the late economist Arthur Okun once said that economic downturns were like airplane crashes, not hurricanes, in that they were fundamentally preventable.

But a financial crisis occurs in hours, not months, and days, not quarters. Something lurches (stocks, bonds, the dollar), investors have a financial bad hair day, and suddenly panic takes over. Financial institutions go bust or grind to a halt, lending stops, and economic activity starts to implode. The world faced such a moment when Russia defaulted on its debt and Long Term Capital tanked in 1998 but averted a crisis through adept management. Yet the tinderbox aspects of the economy — escalating stock prices and margin debt — have only increased since then.

That doesn't say that such a crisis is in the works. But it does say that we're evermore vulnerable to one, and that's the part of the horizon we need to scan. And it argues that T. S. Eliot, in his poem The Hollow Men, was wrong. This time, when the world ends, it will be with a bang, not a whimper,

Hail, Hail Fredonia

Ecuador’s having one of those globalization moments: its President tried to replace his country’s local currency with the U.S. dollar last month. That set in motion both a military coup and a debate over the virtues of adopting the dollar in daily use outside the United States. Is it really time for Ecuadorans to pass the buck?

Anyone who’s gone shopping in Third World tourist havens, or reads about Russian gangsters who like hundred dollar bills so much they print their own, knows that the dollar is welcome all around the world. But developing countries like having their own currencies. After all, when a government prints money, it makes money: you slap a few numbers and the picture of a national hero on a piece of paper, and suddenly it’s worth something. Not a bad deal.

That is, until people lose faith in it. If the world lacks faith in your currency, no one’s going to accept it to pay for goods or repay loans, and suddenly you can't do either. So places such as Ecuador — and Hong Kong and Argentina and now perhaps East Timor — are deciding either to tie their currency to the dollar permanently or simply use dollars instead of local paper. No more speculative attacks on their currency, no more printshop money shenanigans. In essence, Ecuador’s making the world a promise — either we’ll stay as productive as the U.S., or we’ll tighten our belts until you can’t tell the difference. Good luck to them.

But this goes beyond money: it tells us something about Ecuador’s place in today’s world. I mean no offense — Ecuador’s a dandy little country. But countries have two purposes — to provide an acceptable standard of living, and to reflect shared ethnic or cultural premises. And as it loses its ability to shape its economy, Ecuador is quickly becoming no more than a cultural emblem of what Ecuadorans share.

And that’s the issue. As global economic integration unavoidably leads countries to become part of currency blocs and free trade areas, countries will find it harder to define their purpose. Belgium, for example, once had its own currency and its own economic policies. As those functions rapidly shift towards the European Union, Belgium will become less a country than a bunch of Flemings and Walloons who don’t like each other. Spain, with its unhappy Catalans and Basques, is also a candidate for dissolution. And if these disaffected areas don’t print their own money, don’t restrict trade, and don’t run Soviet-style border checkpoints, who’s really going to care?

And so, Ecuador's dollar policy leads to a paradox: global economic integration, with its common money and shared rules, will leave us with a world of more countries, not fewer, ethnic ministates that subscribe to basic global economic etiquette and can then go about doing the important business of dancing their national dance and taking their national hero's birthday off.

Hail, hail Fredonia, land of the brave and free.

A Thousand Years of Economic History in Three Minutes

The millennium ends today. Let’s review it.

A thousand years ago, life was nasty, brutish, and short. People could neither read nor write and never traveled further than they could walk unless the Pope told them to take Jerusalem from the infidels, which they couldn't. Best invention of the 1200s — the flue, which made indoor heating possible. Try living without it.

The invention of movable type in the 1400's, originally conceived to expand the production of Bibles, paradoxically allows the Reformation and breaks the monopoly in the religion industry without intervention by the Justice Department. This, in turn, allows broader perspectives on the world, and alternative centers of power, to emerge. Meanwhile, mercantile Venice invents banking and becomes the Silicon Valley of the 1500s and before you know it, improved navigation and the discovery of pitch from pine trees — which stops boats from leaking when they cross oceans — allow an age of discovery, trade, and colonization to emerge.

Credit, trade, markets, more widespread literacy, arithmetic, and rationality, and newly-plundered natural resources from faraway places all raise the European standard of living to something other than dire poverty. Unfortunately, Europe's trees are cut down to make pitch and to heat indoor spaces using the flue, which leads to the use of coal, which leads to water seeping into coal mines, which leads James Watt to invent the steam engine so you could pump the water out. And, in 1793, a bunch of businessmen sitting under a buttonwood tree form the New York Stock Exchange. So the world now has investors and something to invest in.

In 1800, people lived in an agrarian society and communication traveled at the speed of horse. By 1900, people lived in an industrializing society with rail transportation, communication by telegraph and soon telephone, mass production and as a result mass marketing, electric lights, widespread literacy, and plenty of broke farmers looking for work.

A handful of guys in garages with tools no better than your Craftsman set change the world: Edison, Bell, Ford, the Wrights, Marconi, that sleepy Swiss patent clerk what's-his-name, and so on. Radio gets better, telephony smoother, and engines more powerful, culminating in a man landing on the moon, which used a computer less powerful than your kid's videogame. Meanwhile, Noyce and Kilby invent the integrated circuit at Bell Labs and Eckert and Mauchley the computer at Sperry Univac, all using tools much better than your Craftsman set, some guys at Xerox invent the mouse and icon-driven computing but don't realize what it's worth, but Steve Jobs does, and so the guys in garages become great commercializers instead of inventors. Thanks to them, the more complex computers get, the easier they are to use, unlike my VCR. McLuhan was almost right — the world didn't become a Global Village by watching itself on TV, but by talking to itself on the Internet, and by using those computers to trade the stuff invented long ago by the Venetians and the guys under the buttonwood tree.

And so, the awards. May I have the envelope, please. Best social transformation of the millennium: the Reformation. Most unrelenting force for progress: technology. And best invention: indoor plumbing. Try living without it.