The Year Of The Punctured Myth
We all live by our conventional wisdoms. This is as true in economic life as it is in everything else. From time to time, these verities are unmasked as partial truths or myths. Perhaps they may have worked once, but not today. Perhaps not ever. Asia's collapse and America's resilience are puncturing a whole series of beliefs. No one is being spared, be they conservatives or liberals, Old Economy believers or New Economy converts. Here are a few:
-- Myth No.1: Countries with high savings rates do better than countries with low ones. Well, the U.S., with its anemic savings, has had several years of high growth, profits, and jobs with little inflation while Japan, for all its savings, has stagnated. South Korea, Thailand, and Indonesia, for all their savings, have stumbled badly. Why? Efficiency. Asia's crony capitalism, with friends and family getting loans from politicians and bureaucrats, has grave limitations. The efficient use of capital, not just the sheer size of the savings pool, is critical.
-- Myth No.2: Less regulation is always better than more regulation. Just get the government out of the way and the economy will soar. Right? Well, the Asian mess is due in no small measure to the total lack of bank supervision around the Pacific Rim. Banks made nonsense loans to companies making nonsense investments. The result was overcapacity from chips to cars and real estate bubbles that burst from Bangkok to Shanghai. A modicum of government oversight is needed to referee markets and make sure they play by the rules.
-- Myth No.3: Long-term planning is better than short-term. European and Asian industrial policy was supposed to provide patient capital for the long run. America's quarterly statements were supposed to force companies to run their businesses for quick profits. Well, Corporate Europe is quietly restructuring to focus on near-term profits. And Asia's amazing fall from economic grace was partly caused by a system that insulated its companies from market forces. It turns out that short-term discipline can produce long-term results.
-- Myth No.4: Big trade deficits cost jobs and hurt wages. The conventional wisdom is that mature economies running deficits suffer high unemployment. But not this time. The U.S. trade deficit is soaring to near-record levels as unemployment is dropping to near-record levels. The jobless rate is down to a mere 4.6%, and real wages are up sharply over the past 12 months. So a high-growth, low-inflation economy based on technology and strong fundamentals can trump the traditional trade wisdom.
-- Myth No.5: Size counts, especially in a global marketplace. Quick, what's the biggest bank in the world? The Bank of Tokyo-Mitsubishi. Does that strike terror in Citibank or Deutsche Bank? Hardly. Again, the efficient use of capital and assets is more important than size. That's a lesson the folks at Union Bank of Switzerland and Swiss Bank Corp. ought to remember as they proceed with their giant merger.
Enough. We've dissed all sides, ourselves included. This exercise should humble us as we enter the new year. Bogged down with their conventional wisdoms, virtually no one predicted the enormous prosperity of 1997. Let's hope they make the same kind of miscalculation in 1998.