Wealth for all in the New Economy

September 11, 1997|By Ben Wattenberg

SURELY YOU'VE noticed the fall of Thailand's currency, the baht. Just a few months ago it was worth 25 percent more than it is now. Is that bad? Should Americans care?

American economists are of two minds. Some say: So much is Different. Others say: So much is the Same. It's important to know who's right, or righter.

If the people who say It's Different are right, that may well be worth an extra 5,000 to 10,000 points on the Dow Jones Industrial Average over the next few years, which will make your pension plan fat, or fatter. And that would be only a small part of the change in store for us.

Those who say Different point to some amazing developments over the last decade. The Cold War ended. Democracy is spreading. Markets have become the economic philosophy du jour. International trade has boomed. Deregulation and privatization have lessened the stultifying restraints of government. Technology-driven advances in transportation and communications have made commerce more efficient.

And so, say the Differentists, this is a new economic era. Inflation has been whipped. The American gross domestic product has been growing almost 3 1/2 percent per year during the last two years. This boom will last forever, or for a long time. The old rules don't apply. We'll all be rich, or richer.

What do the Same-ists say? Mostly, ''Ho-hum; been there, done that.'' And they have lots of history on their side. Capitalist economies do seem to operate in cycles. It was once called boom-and-bust. Recently it's been more like moderate-growth-and-mild-recession. We're doing very well right now, say the Same-ists, but just hold your breath; it will change. It always does.

As a ''for instance,'' American Enterprise Institute economist John Makin points to what's happening in Asia right now. The so-called ''tiger'' economies and China have been growing so fast that they are now facing a classic capitalist dilemma.

Entrepreneurs build more factories, producing more goods, until the amount of goods produced is more than customers, foreign and domestic, will consume. This ''supply shock'' causes manufacturers to cut prices. Deflation. The value of the currency falls. Still not enough buyers. Employers lay off workers, demand for goods falls further. A recession ensues.

The advent of a global economy, says Mr. Makin, could make Asia's problems into America's problems. For now, deflation in Asia cuts prices in America, keeping inflation low, or possibly even negative. But after a while, even the startling American economy could take a hit. American workers could start losing jobs to discounted foreign goods. Demand goes down still further, and so on -- into a recession right here in America. Ho hum; been there, done that. Cycles happen.

Bothist outlook

Both the Differentists and the Same-ists seem to make sense. Who's right? Both are. (I am a Bothist.)

Either the New Economy makes sense, or economics itself doesn't make sense. We did so many things right. Trade, markets, peace, democracy, deregulation and technology were just what the doctor had ordered. We deserve an economic bounce from all that. We're getting it.

At the same time, the laws of market economics have not been repealed. For example, there is no known way to prevent over-capacity in a free economy. (How many fast-food restaurants can your neighborhood support? How many athletic shoes are needed from Thailand?)

So what do we get? A cyclical capitalist economy, but operating from a higher base than before.

If you think you can time the actions of complex markets, then -- at precisely the right moment -- move your assets from stocks into bonds and cash. Then -- at precisely the right moment -- put the assets back into stocks. If you can't time the markets (no one can), then diversify and sit tight as the differences and the samenesses of the New Economy play themselves out in a generally favorable way.

Bothists should make out very well in the decades to come. We can all drink to that.

Ben Wattenberg, is a senior fellow at the American Enterprise Institute.

Pub Date: 9/11/97

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