Global Growth Needs a Champion By Jim Griffin Special to TheStreet.com 7/22/01 10:00 AM ET

Do you know who Messrs. Weber and Fechner are, or were? Hint: They were European scientists. Give me a minute and I'll elaborate.

Another pop quiz. Can you name the parties convened at the G-8 summit meeting held in Genoa, Italy, last week? Hint: None of them answers to Sleepy, Dopey or Grumpy. Despite appearances, the global economy is not Snow White and the Seven Dwarfs. If it weren't for the many types of political incorrectness implicit in this allusion, however, it might be an appropriate image for the response of the industrial world's leadership to the threat of a worldwide recession. This is serious. Someone should do something. Is there a show of hands? No? OK, Snow White, er, U.S., that leaves it up to you.

I got some backtalk last week from correspondents in Europe when I argued that the right way to think about the problem of the strong dollar is to recast the issue as one of a weak euro. (We might include Japan in this analysis too, but considering all the good it would do us, why beat our heads against that wall?) If the weak euro is one of the key symptoms of a global malaise, something should be done about it and it's up to Europeans to take the appropriate actions to strengthen the euro. It is not possible for the U.S. to do that.

Look around. Argentina is in crisis. Singapore and Japan admit that their economies are in recession. The Organization for Economic Cooperation and Development projects that global growth will fall by half this year. The International Monetary Fund sees global recession as a fair likelihood. Clearly, what is needed now is faster global growth. The situation would seem to be one ripe for action, but what we get out of the G-8 summit are carefully crafted pieties and platitudes about the encouraging nature of the outlook.

Policy actions designed to stimulate faster growth are clearly indicated, and in the U.S. the standard tools of stimulus, monetary ease and tax cuts, have been earnestly trotted out. But as Alan Greenspan testified last week, "the uncertainties surrounding the current economic situation are considerable, and until we see more concrete evidence that the adjustments of inventories and capital spending are well along, the risks would seem to remain mostly tilted toward weakness in the economy." Said differently, we have administered the medicine, but it is not clear yet from the patient's condition that it is working.

I asserted above that the dollar's elevated value relative to the euro is a symptom of global malaise, i.e., more in the nature of an effect than a cause. A defense of that assertion might be found in the most recent annual report of the Bank for International Settlements. "The persistent strength of the dollar [is] rooted in the belief that the U.S. economy, propelled by higher productivity growth, would in the medium term continue to expand at a considerably faster pace than the other main currency areas." Said differently, grow faster and your currency gets stronger.

But the European Union has, by its own rules, denied itself that sensible, and in this case eminently self-serving, strategy. Melding the many European central banks into one European Central Bank was a historically immense challenge. To prevent the result from descending into a cacophony of differing policy prescriptions, the bankers agreed to dedicate themselves to a single goal, price stability, measured by a simple statistic, i.e., inflation less than 2%. Monetary ease is not possible if the price measure won't permit it. And a weak currency pushes up that inflation statistic, which, you see, is the dilemma.

Fiscal stimulus, then? Sorry, not possible. The strictures of the Stability and Growth Pact require the several nations to restrict their borrowings and pay down a meaningful portion of their indebtedness. These are restrictive actions, of course, but they are necessary to harmonize policies and economic outcomes across the nations of the Union.

The European Union has thus excused itself from any responsibility for global growth. Its focus is entirely on the noninflationary convergence of many constituent economies into one great economy. If the global economy is at risk of spiraling into recession, well, we'd like to help but, you see, it is not possible.

Imagine if the Federal Reserve were run by a bunch of strict constructionists. To the best of my knowledge, it lacks the statutory authority to act as the lender of last resort to the global economy. My recollection is that the Fed, as a creature of Congress, acts under the authority delegated to it in the Federal Reserve Act, the Employment Act of 1947, and whatever it is they now call the act formerly known as Humphrey-Hawkins. Nowhere in those laws, I'm guessing, does it say that when Thailand, or Russia, or Argentina, or especially the European Union gets into trouble, ride in and bail them out. But that is clearly what happened in the financial crisis that followed the Russian default in 1998, and it is effectively what is being asked of the Fed now, given that the ECB has taken a pass.

Back to Messrs. Weber and Fechner. Weber was a German physiologist, and Fechner was a physicist who collaborated with him. On the basis of laboratory experimentation, they demonstrated that the response to a stimulus tends to diminish with repeated applications of that stimulus. In order to maintain a given level of response, it becomes necessary over time to increase the stimulus, i.e., you have to up the dosage. In economists' jargon, that's called diminishing returns.

Last week, I referred to Fred Bergsten's view that many of today's global issues are a function of the incompleteness of globalization. In the current setting, one of the problems that arises is that no one else but the U.S., and it by default, takes responsibility for maintaining global economic growth. This is a structural problem, in effect a constitutional issue. But it was no big deal when the sun was shining. Now that the rain clouds are gathering, however, it might be a big problem.

But the European Union, in blatant disrespect of Messrs. Weber and Fechner, seems by its inaction to suggest that the answer is for the Fed once again to stimulate U.S. consumption through the time-tested effect of lower interest rates on housing and consumer durables. It has always worked before, right? Give it time. And if the response is weak this time, well, just up the dosage.

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