BY DONALD MORRISON Davos
Topic A on the first day of this year's World Economic Forum was clearly whether
the U.S. economy will slip into recession and take the rest of the world with
it. Actually, a more pressing subject on participants' minds was whether
anti-globalization fanatics would break through police lines and murder us all
in our beds, but that wasn't what we were here to discuss. A quartet of
high-profile economists declared in one early panel discussion that there's
indeed economic trouble ahead, though not catastrophe. Asked whether the U.S.
economy would have a hard landing or a soft one after the recent boom, Princeton
University's Alan Blinder surmised: "Bumpy to hard, but most likely not a
recession. I'd rate the probability of a recession in the U.S. at about a third.
Of course, if you look back at the past few years, when the probability of a
recession was zero, a third looks awfully high." He did say, however, that U.S.
growth would slow from the current roughly 4% to perhaps 2%, and quickly. "If
you're sitting in the front seat when that happens, you'll definitely hit the
windshield. Better fasten your seatbelts."
Bumpy or not, will a U.S. slowdown cripple the rest of the world? "We're not
talking about a global recession," comforted Merrill Lynch economic adviser
Jacob Frenkel. "We're talking about a slowdown of non-sustainable growth." In
other words, the recent tech-led investment binge simply could not continue.
"The year 2002 will be a much more sensible year," said Frenkel. Even 2%
growth, he noted, is still growth, and much more sustainable in the long
run.
Some analysts have suggested that Europe might replace the U.S. as a destination
for investment if America's growth evaporates. Jurgen von Hagen of Germany's
University of Bonn doesn't see that happening anytime soon. "If the question is
will Europe replace the U.S. as the engine of the world economy, the answer is
negative." For Japan, the answer is even more negative, according to Kenneth Courtis,
Asian vice-chairman of Goldman Sachs. He quipped: "The only
way you could be optimistic about Japan is to look at the charts upside down."
One thing on which the four economists agreed involves the Bush Administration's
proposed tax cuts: they're a lousy way to prevent the threatened recession. "It
requires an unwarranted leap of faith to think that you can time a tax cut to
prevent a recession," said Blinder. Agreed Frankel: "Fiscal fine-tuning
doesn't work. You always end up fighting the last war." Instead, the quartet
said, monetary policy is a more effective tool. Courtis warned that the prospect
of a tax cut — and the uncertainty about how big a cut Bush could actually pull
off — would complicate the U.S. Federal Reserve's efforts to use monetary
policy to ensure a soft landing. Von Hagen cited a recent study showing that the
average U.S. family already pays only about 10% of its income in federal tax, a
figure people in most developed countries would envy. He scoffed: "Europeans
would ask, how low do they want to go?"
So Americans shouldn't worry about whether they'll get a tax cut, or even
whether their economy will slip into recession. They should worry about those
anti-globalization protesters who, if they get their way, will slow the world's
march toward open markets and low barriers to trade. That would definitely
murder global prosperity in its bed.
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