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 user 2005-05-21 at 1:20:00 pm Views: 95
  • #9396

    America’s “Blanche DuBois Economy”

    Author and economist William Wolman describes the U.S. as being too dependent on the kindness of China

    Former BusinessWeek Chief Economist William Wolman takes a page from Tennessee Williams’ A Streetcar Named Desire to describe the current condition of the U.S. economy: It depends on the kindness of strangers.

    “We have two huge deficits, in our federal budget and our balance of payments, and we are essentially depending on strangers to finance them,” Wolman explains, in commenting on U.S. efforts to goad China into revaluing its currency so that it will not be so overvalued against the dollar. And he thinks China has the stronger bargaining position.

    Wolman calls himself a “card-carrying member” of the Flat Market Society because of his view that the stock market, essentially flat in recent months, will remain that way or even drop slightly for the rest of the year.

    These were a few of the points Wolman made in an investing chat presented on May 17 by BusinessWeek Online and Standard & Poor’s on America Online, in response to questions from the audience and from BW Online’s Jack Dierdorff. Edited excerpts follow. AOL subscribers can find a full transcript at aol.businessweek.com/chat.

    Q: Bill, you called yourself a member of the Flat Market Society as a play on “flat earth.” Are you still a card-carrying member?
    A: Well, it certainly hasn’t been the wrong position to be in. The market, as you know, hasn’t done much since the turn of the year. And I basically expect that to continue. So I’m proud to be a member of the Flat Market Society, and maybe to have even invented it.

    Q: A timely question: What do you think will happen with the Chinese currency relative to strength against the dollar?
    A: Unfortunately, when [Treasury Secretary] John Snow tries to do a snow job, he really succeeds. It would seem to me that there is some pressure on China to let its currency appreciate in steps, whose timing and size are determined by the Chinese government. The Snow statement has been interpreted as a way to fend off a push for tougher measures against China that could be evolving in the American Congress.

    I would not, however, think that the Chinese will be goaded into doing anything that will undercut their huge export advantage. Remember, they own our currency. We don’t own theirs. And they have the stronger bargaining power.

    Q: What economic news do you look for to signal a healthy corporate environment? And conversely, what economic clouds worry you at this time?
    A: Let me take the second half of the question first. Anne Colamosca, with whom I’ve written two books, and I are testifying this week before the congressional commission on trade with China. We’ve just handed in our testimony, and one of our basic points is that the best way to characterize the American economy right now is as the “Blanche DuBois Economy.” She, you will remember, was a major character in Tennessee Williams’ Steeetcar Named Desire.

    Her most famous line, of course, is “I have always depended on the kindness of strangers.” And that’s the position that the U.S. finds itself in right now. We have two huge deficits — in our federal budget and our balance of payments — and we are essentially depending on strangers to finance them.

    It’s obvious that fighting a war and cutting taxes at the same time has been a profligate way to run the economy. And I find it hard to believe that there will not be consequences in terms of slow growth and tough employment opportunities in America before it’s all over.

    Q: How about the first part of the question — what economic news will you be looking for to signal a healthy corporate environment?
    A: Well, obviously, the kind of news that would help is relatively strong sales growth, coupled with some pricing power. Pricing power right now is mostly in the commodity sectors, and it provides limited benefits to advanced manufacturing operations. So again, I think that profits growth will be moderate, even though there’s no doubt that the Bush Administration does pursue tax policies that favor the return to capital.

    Q: When do you predict that we will have a strong stock market rally that stays for a while?
    A: As some of you know, I’m a great admirer of Robert Shiller’s work, especially Irrational Exuberance. In that book, he pointed out that stock-market bubbles of the magnitude that we had in 2000 are followed by long periods in which the stock market doesn’t go anywhere — periods that can and have lasted for more than a decade. It was this insight that caused me to found the Flat Market Society. And I stick with it.

    We have a few years to go before the market will revive substantially. And that will happen only if we don’t break our picks in our military operations.

    Q: Are we experiencing a real estate bubble similar to the ’20s, ’60s, etc., or is asset inflation in housing normal?
    A: The answer is that some asset inflation in housing is normal. However, that doesn’t mean to say that there will be no real estate bubbles in the U.S., although it’s not likely to be as pervasive as was the stock-market bubble.

    For your information, Shiller has a new edition of Irrational Exuberance out — it came out last month — and it does discuss the housing bubble in the very careful way that he did the stock-market bubble.

    Because of the nature of markets, a housing bubble is much more difficult to forecast. But I do think that in some areas of the country, we will have what proves to be a bubble before it’s all over.

    Q: Is it too simplistic to say that U.S. economic troubles will need time to sort out; until then, do not invest in stocks?
    A: I wouldn’t quite put it that way. I would ask the question of whether there are any signs they’re starting to sort out. And I don’t see that. I’m troubled by things like the problems at the Pension Benefit Guaranty Corp. And there’s no doubt that rational Social Security reform is needed in this country.

    My major fear is that the U.S. is burdened by its military obligations, and that has historically sapped the energy of the countries that have either sought military leadership or that have had it thrust upon them.

    That’s what really scares me, as does the fact that our educational system is failing to produce tech, computer, and information-technology workers in the abundance that they are appearing in some other countries. We aren’t taking our education seriously enough. That may sound like a platitude, and it is a platitude, but boy, is it true!

    Q: On Social Security, what do you think of the Bush proposal to privatize part of it, which doesn’t seem to be going anywhere?
    A: I think that the solvency question is far more important than the privatization question, and I would like to see the privatization question set aside until the solvency issue is addressed.

    Beyond that, there’s little that I can add to the conversation, except to say that it seems to me, with problems that are occurring like the ones at the Pension Benefit Guarantee Corp., this country has a way to go before we privatize part of Social Security. Think of the problems that we’ve created by a series of large sector malfunctions, as has happened with the airline industry.

    Q: Do you see any political likelihood that we will deal with the twin deficits, budget and trade?
    A: It’s hard to see that happening, and I think the longer-term implications are to slow down American economic growth, especially for people who earn their living from work rather than capital.

    Q: If it were in your hands, what would you do to U.S. tax policy?
    A: I’m a very conventional economist in the sense that I believe that simplifying the tax code and getting special preferences out of it — to the degree that they’re in it — is a highly worthwhile goal. So I would go for basic tax reform. That’s my principal interest at this point.

    I find it hard to believe that…there will be, on a sustained basis, a capacity for the U.S. to improve its fiscal position hugely without substantial cuts in defense spending. That’s where I would look for possibilities, though it’s hard to be optimistic that that’s the way things are going to work out.

    Q: Are bonds during a rising-rate environment the only safe haven for 2005?
    A: That question is put in a good way. I think the safe thing to say is that I would, at the present time, use the least risky assets I could for my investments. I do not believe we’re in an environment in which the payoff to bold investing will be high.

    Now, I know that that’s not something my old friend and colleague Jim Cramer would say, but I really believe that we’re at a time in which people should be very prudent. That means relatively low-risk investments.

    Q: If NAFTA were working, wouldn’t our system be exported to Mexico and end the illegal immigration?
    A: Your question is a very good one. The U.S. and Mexico are in very different phases of development, and obviously it’s hard to meld the countries together. Just look at the successes in the free-trade area with Canada and those with Mexico. The countries [the U.S. and Canada] are much closer to the same stage of development, and their educational systems are producing similar numbers of students in each educational class.

    So in some sense, it has been very difficult to make NAFTA work, and I’m afraid that was fully ordained by the differences in the stage of development between Mexico and the U.S. That said, there is something about NAFTA that’s worthwhile, because despite all the messes, it still holds out the hope that Mexico can catch up.

    I dare say it will catch up at some point, but it’s rather obvious that the developments of the past few days, particularly the unfortunate remarks of President Fox about American blacks, haven’t done anybody any good. However, I believe that Mexico has a brighter future with NAFTA than it would have without it.

    As my mother always used to say, “rich or poor, it’s good to have money!” It’s important to remember that poverty — long-term poverty, as has affected Mexico — is hard to overcome

    Q: How’s your crystal ball? Will the market end 2005 up or down, and by how much?
    A: My own guess is that the market will end the year down, but not by a lot. I still am the founding member of the Flat Market Society.