“An Upbeat View”

Speech to Ex-Im Bank’s Annual Conference, Omni Shoreham

James K. Glassman
Resident Fellow
American Enterprise Institute

Thank you, Phil Merrill. Phil has been my friend and mentor for more than 25 years in Washington. He is a great public servant, in the tradition of Acheson, Stimson, Clifford, Bob Strauss – someone who has moved from success in the private sector to success in the public, back and forth, with a serious commitment to public service. Phil, I salute you and the important work that the Ex-Im Bank has been doing under your stewardship.

Phil and I share several things. First, a deep interest in public policy; second, a background in journalism; third – and I hope nothing has changed here, Phil – optimism about the American economy.

Let me put these together. What we read and watch and hear in the media today is a litany of woes about the American economy. A housing bubble, runaway gas prices, huge deficits, a collapsing dollar, a shrinking stock market, rising interest rates, corporate scandals. You would think we were entering another Great Depression, if we’re not already in one.

Much of the rest of press in the rest of the world views us, with a certain schadenfreude (guilty pleasure at another’s pain) in the same way. I was recently in Toronto and picked up a copy of Macleans, the popular Canadian newsmagazine. The cover headline said: “Is America Going Broke?”

The thrust of the article is that American WAS going broke and – worse! – that Canada would suffer. After all, 80 percent of Canada’s exports go to the U.S. (You might call that a highly concentrated, rather than broadly diversified, portfolio.)

Now, my main message to you today is that America is NOT going broke. In fact, the U.S. economy has never in its history been in better shape. Let me repeat that: the American economy has never been in better shape. Nor has the global economy – and the future is bright – though not without significant threats (which I will address in this forecast, which I’ll call “Sunny, With a Chance of Afternoon Thunderstorms”).

The U.S. just broke the $11 trillion-mark in GDP. That comes to over $100,000 per U.S. family. This is a gigantic economy. It is not hard to find individual problems, in sectors, in regions, in specific economic numbers. But look at the big picture.

The U.S. grew faster than any developed economy last year – by far. for example, Gross Domestic Product in the Euro Zone (that is, the countries that have adopted the euro as their currency) grew just 1.6 percent, compared with 3.8 percent in the U.S.; in 2003, Euro Zone growth was a mere 0.8 percent, compared with 4.2 percent. The unemployment rate in Germany is a whopping 12.0 percent; in France, 10.1 percent. U.S. unemployment runs 5.2 percent.

In a speech he gave last November, chairman Merrill pointed out that our Cold War adversary, Russia, has an economy that is three percent the size of ours – or about the same size as Holland’s. China is about three Hollands. Brazils, with 60 percent of our population, has a GDP of around $500 billion – less than 5 percent of ours.

My own favorite statistic on the dominance of the U.S. economy is that it is larger than the economies of the next five ranking countries – Japan, Germany, the U.K., France and China – combined.

But this is nothing to gloat about.

It would be far better for America if the world were doing better.

Never before over the past 100 years has the gap between U.S. imports and exports been wider than it is today. Never has the U.S. been so indebted to foreigners. There are several reasons, including a relatively low U.S. savings rate and a rising federal deficit. But the main reason, in my view, is much easier to understand. It is that demand from abroad has been low – not because U.S. goods are inferior, but simply because Europe and Japan have not been growing. Japan, incredibly, is officially back in recession: three quarters of declining GDP in a row. Germany also declined in the fourth quarter of last year. Both of these nations, numbers two and three in the world, have been growing at 1 percent or less for the past decade.

It is, in fact, miraculous, that the U.S. economy has done as well as it has – and that the export sector, especially, has been as successful as it has been in the face of such sluggish performance by Europe and Japan. Exports have roughly doubled since 1991. We are now selling $100 billion worth of goods and services abroad per month. As recently as 1967, we were selling $300 million worth.

Exports represent more than 10 percent of the U.S. economy. That is an impressive number when you consider how much of our GDP, like housing, haircuts, meals at restaurants, can’t be exported.

Our success at exporting is a tribute to the people in this room – to the smart allocation of capital, to American talent and hard work. I am not going to wring my hands about how much we are importing.

Imports, as Adam Smith said in 1776, are what we want for our own well-being. Exports are how we pay for them. We work so that we can eat. We don’t eat so that we can work. Imports, in other words, are good. They are a sign that we are thriving. You want to end the trade deficit overnight: just plunge the U.S. into a recession so that we can’t afford anything made abroad. That is the close to the condition that Europe and Japan are in now.

Still, I don’t want to exaggerate the problems in Europe and Japan. Standards of living are high, even if productivity lags and population gaps loom.

In 1931, John Maynard Keynes, the most influential economist of the 20th century, made a very bold prediction. It was the depths of the Great Depression, but he predicted that the “economic problem” would be solved in 100 years.

What is the economic problem? It is ordering a political system and an economy so that people can produce enough to sustain themselves and lead long and comfortable lives.

In the developed world, i.e., among nearly all the billion or so people who live in the U.S., Canada, Europe, Australia, Japan and a few other parts of Asia – the economic problem has indeed been solved, and ahead of schedule.

These achievements are of recent vintage. Until 200 years ago, there was virtually no economic growth at all, anywhere – perhaps a couple of tenths of a percent a year. Without growth, the improvement in the general welfare was nearly nil. Then came the industrial revolution, and the health revolution.

Robert William Fogel, a Nobel Prize winning economist at the University of Chicago, has written in his book, “The Escape From Hunger and Premature Death,” that the most remarkable human achievement has been the extension of life spans during the 20th century. In 1900 in the United States, life expectancy at birth was 48 – about the same as it was in 1750. Last year, as we learned from figures released yesterday, life expectancy at birth is 78. Roughly, the same phenomenon has occurred in France, Britain and Canada.

Why? Fogel cites public health reforms, like clean drinking water and control of epidemics; advances in medical knowledge and practices, improved personal hygiene, and rising standards of living. All of these factors are directly related to economic growth and innovation. Just one example: As recently as 1910, gastrointestinal infections claimed 120 lives per 100,000 males each year; today, less than one life in 100,000.

The statistics released yesterday show that in just ONE YEAR deaths per 100,000 by heart disease in the United States fell 4 percent; cancer, 3 percent; stroke, 5 percent; AIDS, 4 percent. Without it, our lives would, in Thomas Hobbes famous phrase, be solitary, poor, nasty brutish and short.

Fogel uses another dramatic set of statistics to make his point. In 1875, the necessities of food, clothing and shelter accounted for three-quarters of total consumption (Fogel counts leisure as a form of consumption for these purposes, and that makes sense). In 1995, these necessities accounted for just one-eighth of total consumption.

In most of the developing world as well, I think Keynes will be right on the mark. The economic problem will be solved. People will live longer and more comfortable and richer lives.

I have a generally optimistic view of the global economy for the next many decades. People want to be well off, and they understand that it is the model of competition and consumer choice, not top-down rule and collectivism, that works. That’s the story in China, in Russia, in Indonesia, in Iraq. Yes, globalization will cause temporary hardship, real hardship. No doubt about that. But the economic problem is being solved.

* * *

I wish this is where I could end my talk, but it isn’t.

There are indeed threats to prosperity. The first I have already cited: sluggish growth in Europe and Japan – the result of a retreat from market economies as well as a kind of lethargy that has accompanied a high standard of living. This could be our own fate in the U.S., as well, though I doubt it.

Still, things are changing again in Europe – and in no small measure because of the change in the European Union itself, the accession of 10 new countries last year, mainly from Eastern Europe. Poland (fifth largest country in Europe), the Czech Republic, Estonia – these are dynamic economies, just emerging, and they will shake up Old Europe.

But as we look out into the future, it is not Europe and Japan that will be the engines of future growth. It is the developing world. This is where a true political and economic revolution has occurred.

But this is also where the threats are – not the threats of outsourcing or competition from low-cost labor. Those are good things – in the great tradition of free trade. America is far better off at home when we can buy at lower prices abroad, as the savings get recycled throughout our own economy.

No, the threat is a disruption of the international trading system that has worked so well since the end of World War II.

Too many leaders in developing nations believe that they can succeed by limiting the inflow of foreign goods and services – either through high tariffs, or more cleverly through non-tariff barriers or through the outright theft of intellectual property, which, more and more, is becoming America’s prime asset category: films, pharmaceuticals, software. All of these can be copied. Stolen.

Jim Pinkerton of the New America Foundation has referred to three countries – China, India and Brazil – as the Axis of IP Evil. And I agree. Brazil’s own government, for example, is in the process of confiscating drug patents. India seems to be getting better. China is another matter. China is making mischief. It is supporting, incredibly, a Brazilian as the next head of the World Trade Organization – Brazil, which was the prime culprit in the collapse of the WTO post-Doha conference in Cancun in 2003.

Yes, I have other worries about the world economy and world stability in general: terrorism, the difficulty of solving the problem of providing pensions and health care for the elderly, when the government-run systems in Europe and the U.S. for such provision are headed for a wreck because of demographic imbalances. Too many old people, not enough young people.

The good news is that the political system is actually addressing this long-term problem: amazing, really.

The dollar? That’s a problem that markets are solving. Don’t forget that between 1997 and 2002, the dollar ROSE 40 percent against the euro. You can argue that the decline in recent years was a natural correction for a currency that became overvalued.

But think about the big picture. Since 1982, the U.S. economy has had only two recessions – or roughly one every 12 years, compared with one every five between the end of World War II and 1982. Both those recessions were mild, and in only one year did the economy fail to grow. The decline was less than one percent. Inflation has been low, productivity has been high. The Dow Jones Industrial Average has risen from 777 in August 1982 to over 10,000 today.

The economy continues its strong growth today despite the incredible shocks since 2000: the collapse of the tech bubble, a recession brought out (in my opinion) by a Fed mistake, the terror attacks of 9/11, the worst corporate scandals in history, the tripling of gas prices. I am sure I am forgetting something.

But the U.S. economy endures – mainly because it is built on a foundation of freedom, of allowing people, individually and in groups, to follow their imaginations, apply their talents, win rewards for working hard and smart. And going anywhere in the world to do it.

The world has become more welcoming to this economic liberalization. As long as the path remains open, Keynes’s prediction of the solution of economic problem, not for the U.S. and Europe but far more important for the billions still in poverty – that prediction will come true.

I salute all of you for the work you are doing to make the world a safer and more prosperous place.

Thank you.