WHILE it is increasingly clear that the United States economic
recovery is finally gathering momentum, economic conditions in the
rest of the world are much bleaker.
Germany and Japan are in recession. The Japanese downturn
threatens to slow growth in the rest of Asia, while Latin America's
emergence from its decade-long crisis looks increasingly
vulnerable. The descent of Russia into depression and
hyperinflation casts a shadow much larger than warranted by what is
left of the Soviet economy.
All of this is mirrored in unstable currencies and nervous
capital markets. It directly affects the prospects of the US
economy. Unfortunately for President-elect Clinton, the US economy
has become dependent on foreign trade and foreign capital. American
savings are too low to finance the recession-swollen budget deficit
by themselves. Exports, whose share of the economy is at a post-war
high, account for most of the little growth in recent years.
Weakness abroad will inevitably limit the pace of recovery in
the US. If the result of faster growth in the US than in its main
markets is rapid deterioration of the trade balance, then the
Federal Reserve could be forced to raise interest rates. Heavily
indebted consumers and companies would inevitably curb their
spending, and the expansion now underway would again falter.
Not all the news is bad. The recent agreement between the US and
Europe on agricultural subsidies could lead to a resolution of the
six-year-old global trade negotiations. This would not only
forestall a potentially disastrous trade war, but would create new
opportunities, especially in services. Nevertheless, international
conditions represent a risk to a US economy already burdened by a
range of factors that have prevented the normal recovery from
recession. Debt levels are too high, the probability of increases
in taxes is too certain, the need for companies like General Motors
and IBM to restructure is too great, and the monetary policy has
been too restrictive.
The result is not only modest growth and slow job creation, but
an economy more vulnerable to developments in the rest of the world
than has been the case in the post-war period.
S Mr. Clinton comes to grips with this reality, it is essential
that he recognize two basic threats to global economic stability.
First, there is a worldwide lack of savings and, second, the major
industrial countries have failed to find common purpose in the wake
of the collapse of the Soviet Union.
The US has long been a net borrower from the rest of the world;
during the 1980s Germany, Japan, and parts of the developing world
filled the savings gap. …