America Sets Pace for the World

Economists sometimes talk of a "locomotive economy."

West Germany got the label In the 1970s and early 1980s. Right now it's the United States pulling the train.

America is the only major industrial nation with enough economic steam up to pull along other lagging countries. Much of the rest of the world hopes that exports to the US will help boost their economies.

"It puts a big burden on us," says Cynthia Latta, an economist at Standard & Poor's DRI, a Lexington, Mass., consulting group.

The husky American economy will suck in so many imports that its trade deficit will rise from $180 billion this year to $274 billion by 2000, she predicts.

At present, the Clinton administration welcomes the locomotive function. Currency devaluations in Asia, including Japan and Korea, promise a flood of cheap imports that will restrain inflation. Americans should enjoy cheaper Toyotas and Hyundais, VCRs and shirts.

Exports will fall. Machines and other US goods will cost Indonesians and Koreans more in their local currencies.

"This will keep the US economy from boiling over," says A. Gary Shilling, an economic consultant in Springfield, N.J. As a result, the Federal Reserve, with its concern that rapid growth could cause inflation, will be kept "at bay." It will be less likely to raise interest rates.

US officials are happier running a prosperous locomotive than sitting in a lagging caboose, like Japan.

After a promising upturn early in the year, Japan has slipped back into a slump, dragged down by a sales-tax hike last spring.

Japan's government, Mr. Shilling says, seems determined to behave economically as the US government did in 1936-37 during the Great Depression. It pushed up interest rates, cut federal spending, and hiked income taxes. Industrial production fell 33 percent in 1937 and 1938.

Today, Japan and other Asian nations face a far milder crisis. But a slowdown, if not a recession, is likely.

Europe is more promising. Smith Barney International Research expects Germany to grow 3 percent next year, France and Italy 2.9 percent, Britain 3.4 percent. But high unemployment and efforts to cut government deficits rain on the parade. "Half a locomotive," one economist says.

With the spread of the Asian crisis to Korea, DRI now predicts US output of goods and services to grow at a modest 2 percent next year and an even milder 1.6 percent in 1999. That's down from 3.5 percent this year.

Being the locomotive economy has its risks. One is political, that the swelling trade deficit will alarm the public.

"Should the economy weaken and the unemployment rate start to rise, we could witness a resurgence in protectionist pressures," notes Nariman Behravesh, another DRI economist.

He sees the defeat in Congress last month of fast-track legislation as a sign of increasing trade tensions. The measure would have permitted the US to negotiate new free-trade deals.

Shilling talks of possibly "nasty" trade wars with Japan and China. Both have huge trade surpluses with the US.

Rising trade deficits deepen the country's position as the world's largest debtor nation. But external debt, at about 20 percent of US economic output - is not extreme.

With the Asia crisis and with the US recovery aging, more economists paint alternative cloudy scenarios.

Mr. Behravesh argues that the world is too dependent on the US locomotive. What if that engine sputters?

"Talk of a 'golden age' seems, at best, prematurely optimistic or, at worst, too focused on the United States," he holds, listing economic problems elsewhere.

Shilling worries about actual deflation in the US, with prices falling on a widespread and chronic basis. He cites 14 deflationary factors ranging from defense spending cuts to shrinking government deficits to a global glut of goods.

Deflation, he argues, could lead to a dramatic shift by US consumers from three decades of borrowing and spending to an extended period of high savings and subdued spending. Such a "consumer savings spree" would ripple abroad as Americans bought fewer imports, he says.

Still, most economists see good times surviving in the US for some time yet.

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