The economy - the final frontier

Over the weekend came the feeling that this space thing is getting a bit out of hand. All right, so the US probe, Spirit, landed successfully on Mars. And yes, it was perhaps predictable and sad that it succeeded where the European Space Agency's explorer, the Beagle 2, was failing. Everyone could even live with the applause at Nasa on receipt of the first photos snapped by Spirit from the surface of the Red Planet. But now comes word that the White House is planning a permanent base on the moon and yet further exploration of Mars. US-led, very likely. It all smacks of colonisation. When, everyone begins to wonder, will the hyperpower wake up to the perils of space overreach?

Meanwhile, a similar question is being raised about US behaviour on a more earthly frontier - the economic one. In a report published even as those irritatingly clear Mars photos were transmitted, the International Monetary Fund sought to expose the perils of US expansion. That space aggressor the US, the IMF's economists told us, was running "significant risks" with its grandiose government spending and tax cuts - just as dangerous, greedy Americans were recklessly spending too much abroad.

According to this sort of reasoning, economic overreach is a more urgent problem than even a Mars campaign. The trade deficit that US profligacy has generated is huge. Especially troubling is the volume of US purchases in China. US spending could cause what the IMF terms "disorderly exchange rate adjustment". Foreigners would dump US dollars and cause havoc; interest rates would rise across the globe. And, we are told, "higher borrowing costs abroad would mean that adverse effects of US fiscal deficits would spill over into global investment and output". The US economic empire is not content to destroy itself; it has to pull everyone else down with it.

This message, however, comes out of some rather earthbound thinking: that life is all about maintaining accounting balances. When, for example, a country's demand for foreign goods and services does not match foreign demand for its products, that imbalance needs rectifying. It is time for the US to put the brakes on its appetites and harmonise with other developed economies. At least that is the view from the IMF's 19th Street offices in Washington.

But let us try looking at the story from a more distant vantage point. Mars, say. From afar, the US story looks more like good news than bad. The Clinton administration did not block growth, at least not in the second half of the 1990s. The Bush administration helped inspire growth by cutting taxes, bringing the capital gains rate and the rate levied on dividend income down to a historically low 15 per cent. Over at the mighty Federal Reserve - albeit just a speck when viewed from Mars - space hero Alan Greenspan controls inflation without sacrificing liquidity.

All this means a fast-expanding economy, and a fast-expanding economy buys a lot of everything. It buys where the price is best - nothing wrong with that, at least not if you are a free-marketeer. It buys abroad, because borders are relatively open, another inherently good thing. Productivity, another plus, increases as well. Foreigners use the dollars they earn to buy US stocks and bonds, which fuels yet more investment. The headline here ought to be "Outstanding Growth", not "Outstanding Cash Mismatch". The trade deficit is merely a symptom of the growth.

To be sure, the trade theorists are not wrong in every respect. The US administration and its congressional friends do need to rein in public spending, which is indeed obscene. The US would indeed crash and burn if foreigners all ceased to buy US bonds and stocks. But while US policy towards the private sector is as stable as it is, the American economy is not likely to - forgive the metaphor - crater.

"Under what conditions would foreigners shift gears and sell their positions in US assets," asks Mickey Levy, chief economist at the Bank of America. "Practically none." The perverse part of the trade balance obsession, he notes, is that by emphasising accounts and abstractions like savings rates, those subscribing to the IMF school of thought are suggesting the US should be like that model saver, Japan.

Let us, however, be polite and say that trade balancers are not entirely off the mark. Maybe it is time for greater harmonisation of developed economies. Then the question becomes: do we really have to ask the US to slow down to get that harmony? Perhaps instead everyone can catch up. After all, the only way the US can really become the sort of enduring threat that the fearful imagine is if Europe and Japan continue to apply policies that yield slow growth. Then the new Growth Gap really will replace the old Missile Gap.

We can even, if we feel like it, take this further and assume our entire argument is wrong and that the US empire is a genuine growth and accounting problem. If you believe that, colonisation of Mars truly is good news.

After all, the planet, we all know, has market potential that dwarfs even - dare we say it - China's. Once trade routes become established and the oxygen machines are up and running, American investment banks will open word-processing centres at the Tharsis Bulge and will outsource from the Valles Marineris. This, in turn, will yield the US current-account deficit to end all current-account deficits and finally humble the overweening empire in the way it deserves. Or so we're told.

© Copyright 2004 Financial Times

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