Surveying the Global Economy

Article excerpt

A few weeks ago in New York City, Carla Hills and Martin Feldstein sat with TNI editor Adam Garfinkle to discuss various aspects of the world economy. Here follows a transcription of that conversation.

THE NATIONAL INTEREST: May I begin, please, by asking each of you your view of what has happened, or not happened, since this past September 11 that may be described as out of line with the early post-attack expectations of economic analysts?

MARTIN FELDSTEIN: After September 11 of last year, you will recall that stock markets collapsed, and the reason was obvious: People were afraid. Consumers worried that the U.S. economy would go into a tailspin, and businessmen worried that such expectations would create a self-fulfilling prophecy In fact, the economy did very well. It has since slowed down, but this is part of a normal cyclical pattern. I don't think we can attribute very much to September 11 insofar as broad economic effects are concerned, and I think this does run contrary to many expectations at the time.

CARLA HILLS: Anticipations of damage may have been excessive, but security concerns continue to be a drag on the market. Companies are spending for protection, an expense they had no idea would be needed before last September 11. The congestion at our borders, north and south, has had an adverse effect on some sectors, too. Many believe --indeed, the administration has said explicitly that it believes -- that another strike is highly likely. This makes the market quite jittery, and this is not about to go away.

TNI: Let me ask this as an addendum: Had the war in Afghanistan not gone as swiftly and successfully as it did, do you think it would have made any difference? In other words, would a general lack of confidence in the conduct of the war against terrorism have translated psychologically into a greater lack of confidence in the economy.

MF: Good question, but it's very hard to say.

CH: It is, indeed, hard to say, but I think we need to keep in mind that the war on terrorism is not over with the campaign in Afghanistan. Clearly, large numbers of bright and thinking people are concerned about the road ahead. Their concerns enter into how the government plans its budget, and into the planning of both companies and individuals. It affects the counties that they will invest in and a host of other decisions. So, yes, there is a link between how people perceive the war on terrorism to be going and their economic decisions on a range of issues and levels. But as Marty suggests, tying down the details of the relationship is very difficult.

East Asian Prospects

TNI: Let's tour the world, shall we? Japan is still, I believe, the world's second-largest economy -- unless one counts Europe's euro zone as a single economy (which I, as a Euroskeptic, do not -- at least not yet). And the Japanese are having great difficulties getting out of their protracted recession. Why has it proven so difficult for them to shake their problems?

MF: The Japanese lack the political ability to tackle the restructuring that they need to undertake. They lack the political wherewithal to put funds into a restructured banking system -- if indeed they could summon the courage to restructure it. And many large non-financial companies, especially in construction and retailing, also need to be foreclosed or restructured. At the same time, the Bank of Japan is tying unsuccessfully to provide stimulus to the system. It has driven interest rates down; indeed, short-term interest rates are down to virtually zero and the longer-term rate is just one percent. But the banks aren't lending because they are afraid to take the risk, as they see it, of lending additional money while the economy is at a standstill and many businesses are insolvent. In sum, then, the Japanese can't deal with their long-term restructuring problems, and they can't achieve the short-term cyclical turnaround that they need to stop prices from falling and to start creating more jobs. …