Risks Of Blind Extrapolation I

The macroeconomic changes between 1998 and 2005 alone are far from trivial. In the year 2000 the US Federal budget had a surplus of 1 percent of GDP. By 2006 the surplus had become a deficit close to 6 percent of GDP, a figure more usually associated with Latin America. From 2001 to 2003 President Bush lowered taxes for the richest Americans quite dramatically, sharply increasing the income disparity between rich and poor. To complicate the story, there are indications that the large investment in computers and software during the 1990s is finally beginning to pay off. In 1987 Robert Solow was quoted in an interview as saying 'you can see the computer age everywhere except in the productivity statistics' (Solow 1987). The phenomenon behind this remark became known as the 'Solow Paradox'.

But labor productivity, which grew at an annual rate of barely 1.4 percent per annum during 1975-95 jumped to 2.3 percent per annum in 1995-2000 and hit 6.8 percent in the second quarter of 2003. In 2003 the Economist asserted that the Solow paradox has been explained at last (Anonymous 2003). Most economists believe that rising labor productivity is unalloyed good news. But experience since the 1990s can be interpreted otherwise.

'Free trade' has been promoted as the secret to global growth for the past several decades, largely as a reaction to the very negative experience that resulted from the counter-productive US trade restrictions that followed the stock market crash in 1929. The Smoot-Hawley tariff of 1930, together with ill-timed credit tightening by the Federal Reserve Bank, triggered a worldwide protectionist chain-reaction that deepened and lengthened the recession into the Great Depression (Eichengreen 1989). Since World War II there have been a series of international conferences aimed at reducing tariffs and freeing up trade again. However, free trade for non-agricultural goods and for capital, but not for labor, has resulted in the movement of manufacturing, and more recently services, away from the so-called 'rich' countries into countries with cheap labor and minimal health, safety or environmental protection. Even jobs in the field of information technology (IT), which were supposed to replace jobs in manufacturing, started to move away from the US in the 1990s. As many as two million such jobs may have gone already, to such faraway places as Ireland and India. Despite the apparent dominance of US-based computer hardware producers such as Intel, Dell and HP, most of the production of components, and even the assembly, has moved to Asia and virtually all new investment in that field is now outside the US.

The result of the disappearance of US manufacturing jobs thanks to (partial) globalization has been a massive growth in the US trade deficit since the 1980s. The trade deficit has - in turn - been financed by foreign - mainly Asian - investment in US government securities. This reverse flow of capital amounts to borrowing not only to finance the government budget deficit, which has also grown by leaps and bounds, but also to finance a consumer spending binge. By the end of 2005 foreign creditors owned $13.6 trillion in dollar assets, a figure that is increasing at the rate of $600 billion per year.

In short, many extrapolations that would have seemed reasonable in 1990 have turned out to be radically erroneous. A closer look is warranted.

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