Other Nations Can Do More To Help Out

A lot of people are seriously worried about the world economy. In Washington last week, finance ministers attending the meeting of the International Monetary Fund called on the leading nations to cooperate on currency exchange rates lest the world fall into recession.

And a former U.S. Secretary of Commerce, Peter G. Peterson, writing in Atlantic magazine warns of a “painful new economic reality� for America which, he says, has been living beyond its means.

Sound and fury. Such hand-wringing only adds to the general confusion. The truth is, there’s as much cause for hope as fear in the world economy, if you look at what’s really going on.

The problem is simple, if frustrating. For years now, the world economy hasn’t been growing fast enough. The developing countries--vast potential markets where billions of people are eager for a better life--have been stunned by debt. The developed countries, especially West Germany and Japan, are growing more slowly than they once did.

The pie isn’t getting larger--and countries are fighting over the pieces. Germany and Japan want to sell to America, but not buy much in return. America wants Germany, which has 9% unemployment, to boost its economy.

But Germany declines--fearing the social change economic growth would bring as much as inflation--and blames the world’s problems on the U.S. trade and budget deficits.

Which is like blaming the customer. The reason the United States has been chief buyer of the world’s exports is that, in an otherwise slack time, it is the obvious economic engine. The U.S. economy is three times the size of Japan’s, and six times that of West Germany’s. So a growing U.S. economy taking in imports means tens of billions of dollars in increased production for the world.

A Standard Under Siege

But now, it’s time for a change. The United States needs to sell more abroad or see its currency buckle under the weight of trade deficits, causing inflation and ultimately recession. Its once-unstoppable standard of living is already under strain.

If you asked whether the average wage-earning American was better off today than a dozen years ago, the answer would be no.

In a book called “Dollars and Dreams: The Changing American Income Distribution�--to be published in the coming week--author Frank Levy, a professor at the University of Maryland and fellow at the Brookings Institution, cites U.S. Census data to show that the median income of a full-time American worker fell from $28,200 in 1973 to $26,433 in 1984--both wages calculated in 1984 dollars.

It was a stunning reversal, coming after the long postwar boom when incomes rose steadily, 2.5% to 3% a year, from 1945 to 1972. Then they stopped rising, because productivity stopped growing.

Productivity is what economists call output per worker, and it is the means by which we make the pie larger so everybody can have a little more. For many reasons, we haven’t been doing that. Oil-prices increases, corporate inefficiency, imports discouraging U.S. production are among the many reasons for productivity’s decline.

It may sound abstract, but its effect is real. Lack of productivity growth is why the U.S. economy now has so many people working two jobs in order to earn a middle-class income. According to Levy it’s why there is a growing spread between the highest incomes and the lowest--when the pie isn’t growing, the strong and weak fight over the pieces. Clearly, productivity growth must resume if this country is to be again a place where each generation can look forward to living better than its parents.

So where’s the hope? It’s that U.S. productivity in manufacturing has been rising 4% a year lately as U.S. companies have mastered new automated techniques. Similar improvements are likely in the service industries--which now constitute over 70% of U.S. business.

But the world economy must become more dynamic to keep those improvements going. So if faraway events, such as Germany stimulating its economy or the world’s nations finding ways to revive growing markets in developing countries, can help the process along, so be it.