Where to watch
FINANCE USA
WILLIAM JANEWAY
Two prime questions stand out in considering the current state and .future prospects of the American economy. The first is: where is the American. economy as a whole heading? The second is: does it make sense any longer to talk about 'the American economy as a whole'?
To begin with the present state of the American economy, two processes have been primarily responsible for the upsurge in prices and interest rates during the last year. The first was the. unfunded Federal budget deficit which grew out of the unplanned and unacknowledged escalation of the Vietnam war, and which forced the Government to outbid the private sector in the nation's money markets. The second was the wage-cost spiral which has pushed prices up even in the face of unpre- cedented import volume (vide the steel industKY).
As it happens, rising wages in recent years have reflected two fundamental aspects of America's economic development : the first is the shortage of skilled workers to implement the new 'technological revolution'; the second is the union organisation of nearly all skilled workers. At a time when even 6 per cent unem- ployment for the nation as a whole leaves the unemployment rate for skilled workers below 2 per cent, a $10 billion slice out of an $850 billion economy is likely to have a derisory effect on the demand for these key workers.
The next step in the chain of economic action and reaction will hit the money markets and interest rates. To the extent that the tax in- crease will reduce the public's spending, the volume of production will fall and the unit cost of each item produced will tend to rise. Layered .cin top of the wage increases being paid out, this means pressure on corporate profits and pressure, in turn, to raise prices, to invest in new and more modern plant and equipment to offset higher costs, and to lay in new inventory before rising prices get too far ahead.
With profits down, the money for new in- vestment must come from outside. As the Federal government slows down its borrowing, allowing interest rates to fall, the private sector steps up its borrowing, forcing interest rates back up. If the public dips into its accumulated savings to maintain its expenditure and indus- try's prodbction, it also sets aside less money for investors to borrow, with the same upward impact on interest rates.
The real tax increase and the hypothetical spending cuts have done nothing, and can do nothing, to transform the fundamental social and political framework within which the American economy operates. At the most simple level, this framework now has two sources of trouble which are not self-correcting through the play of market forces The first lies in the labour market: the lack of harmony be- tween the skills and job distribution of the labour force on the one hand, and the pattern of demand for human resources generated by business (and government) on the other. The second lies in the financial markets: the un- planned inefficiency with which the public's savings are mobilised to meet public needs.
During the next six months and for the fore- seeable future, these two problem areas will Continue to dominate the domestic behaviour and international impact of the American economy. The labour market and the money market are where to watch, not the economy as a whole. Whatever the Gross National Product numbers say from one quarter to the next, higher wages, higher prices, higher interest rates, higher imports (all on a scale too massive for any conceivable productivity increase to
offset or pay for) will be the key characteristics of American economic performance. Short of the deliberate creation of an economic down- turn of unprecedented postwar dimensions, with mass unemployment and virtually no private investment, the Federal government's manipu- lation of 'the economy a, a wh.:1e. can have at best a marginal effect.
How long can this go on? For most countries, the limit is reached when its goods are priced out of the market, at home and abroad. But with her imports and exports running at barely 3 per cent of national income. America can live with pressure on the trade front for a long time to come. Two sources of political pressure are building up now : from overseas, in the form of continuing monetary disturbance; and in her cities, in the form of accelerating social unrest. It will take political leadership of the highest calibre to respond to these political pressures by going to the root of America's economic troubles.
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