Growing, Growing ...Gone?

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Sachs and Tyson are both Democrats, although Sachs insists his work is strictly nonpartisan; their Republican counterparts argue that the U.S. economy is going to keep humming along despite red ink and higher rates. That view was seconded last week by Federal Reserve Chairman Alan Greenspan, who suggested in London that tighter U.S. fiscal policy could stabilize or even shrink the U.S. current account deficit. Time's economists don't buy that — but, mindful of the alarmist predictions of two decades ago that turned out to be wrong, neither Sachs nor Tyson is forecasting a calamity such as a market crash or a full-scale depression. They also expect that the wider damage will remain limited. "The U.S. deficit is really bad news for Americans, but it's absorbable in the world economy," said Tyson.

Others find even that tepid prediction to be overly optimistic. Moisés Naím, a former Venezuelan Trade Minister who is editor of the Washington-based magazine Foreign Policy, agreed that the world economy was unlikely to crash. "But there's no doubt that America's adjustment is going to have consequences," he said. "U.S. interest rates matter to the rest of the world. They are a conveyor belt that is going to transmit shock waves to others." Rising interest rates could choke off consumption by American households, sharply curtailing imports from China, Germany and other countries that have been the motor for these nations' economies. As Paul Achleitner, a board member of Germany's insurance-giant Allianz, put it: "We must thank the U.S. consumer for all they have done in the past decade or so in terms of driving the [world economy] forward."

AMERICAN DOUBTS
The focus on American risks to the global economy is especially conspicuous, since last year's board reflected a widespread — and correct — assumption that U.S. growth would be significant and serve as an engine for the rest of the world. The concerns expressed at the time were largely about whether the Chinese economy risked overheating and whether Europe could pull itself out of a rut. Now "the perception has changed," said Pascal Blanqué, chief economist at France's largest bank, Crédit Agricole. Even though U.S. economic growth of about 4.4% last year far outpaced European growth of about 2%, "the U.S. is now more criticized, while Europe is starting to be credited for positive steps in the right direction." Significantly, he noted that the European Central Bank recently voiced open criticism of U.S. deficits for the first time. In a financial stability review published in December, the Frankfurt-based bank described the deficits as "posing a significant risk for global financial stability." Europe, by contrast, continues to run a relatively tight fiscal policy. Until the Federal Reserve's most recent increases, European interest rates have also tended to be higher than those in the U.S., and unlike spend-happy Americans, European households stash away substantial amounts of their earnings into savings. In the euro zone, about 14% of household income is saved, compared with less than 2% in the U.S.

The Bush Administration foresees a pain-free fix: continued growth, it argues, will automatically reduce the size of the budget deficit. Indeed, U.S. Treasury Secretary John Snow argues that the trade deficit is partly the result of lopsided growth. "We are growing faster than our trading partners, and we are creating more disposable income than they are," Snow said last month. "We need Europe to be more of an engine of growth and we need Japan to be more of an engine of growth." But Time's experts aren't convinced, and expect Bush will have to pare spending regardless of how strongly the economy grows. Already there are signs that momentum may be slowing: the estimated 3.1% annualized growth rate posted in the fourth quarter is the weakest in two years. Naím even predicts a battle in Washington between fiscal conservatives, who advocate a hands-on approach to managing the budget, and what he calls "starve-the-beasters" — more ideological proponents who would like nothing more than to see some public programs bankrupted. (Here, too, there are echoes of the Reagan years.) Naím expects that the fiscal conservatives will be defeated in this contest.

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