Debate: America the Boastful

Paul Krugman

From Foreign Affairs, May/June 1998

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Summary:  Only a few years ago pundits were sure that the United States was losing to Asia and Europe and had to emulate their more state- directed economies to remain competitive. Now the conventional wisdom is that America is number one and that the rest of the world should adopt its more laissez-faire approach. In fact, neither caricature is right. Asia was booming and now it is slumping, but it will be back. Europe's underlying ossification will persist. But most important, while the U.S. economy is in a period of robust growth, nothing fundamental has changed. Its long-run growth rate has not accelerated, productivity has not risen, and the structural unemployment rate has fallen by one percentage point at most. Come the next recession, all this triumphalism will seem silly.

Paul Krugman is Professor of Economics at the Massachusetts Institute of Technology.

WHAT HAS NOT GONE RIGHT

The late 1980s were a good time for Europe: growth accelerated, unemployment fell, and dreams of European unity seemed within reach. A mood of almost giddy optimism -- Europhoria -- swept the continent. Even non-Europeans were caught up in the spirit. As late as 1992 the economist Lester Thurow's bestseller Head to Head proclaimed that "future historians will record that the 21st century belonged to the House of Europe."

So in 1987, when the Brookings Institution published a collection of papers entitled Barriers to European Growth: A Transatlantic View, which focused on the syndrome of slowing growth and rising unemployment that had become evident over the previous 15 or so years, many European commentators dismissed the volume as a case of fighting the last war. Europe, they insisted, was on the move; energized by the transition to a single market, it had entered a period of renewed growth and technological vigor.

In retrospect, European elation was, to say the least, premature. The structural problems that underlay Eurosclerosis had not been resolved; they had merely been masked by an upswing in the business cycle. When the next recession arrived -- and there is always a next recession -- it raised unemployment rates not merely to their previous peaks but, in most of Europe, to levels not seen since the 1930s. All in all, it was an object lesson in the difference between cycle and trend: one swallow does not make a spring, and a few good years of growth do not necessarily signal a turnaround in economic fundamentals.

While Europeans may have learned that lesson, Americans have not. Although until quite recently titles like Donald Bartlett and James Steele's America: What Went Wrong? typified commentary about the U.S. economy, and economic journalism was dominated by scare headlines about downsizing, after a mere two years of good news America's mood has become startlingly triumphalist. In the view of many business and political leaders America has entered the era of the New Economy, in which traditional limits to economic expansion are no longer relevant. And because America has a New Economy and the rest of the world does not, it is once more indisputably number one, and the rest of the world must adopt its values and emulate its institutions if it wants to compete.

To anyone with a sense of history, this is all deeply worrying. If pride goeth before a fall, the United States has one heck of a comeuppance in store. Yet the strengths of the U.S. economy are not merely a matter of boasting. The task is to separate the realities from the myth. What has gone right with America, and what has not?

HOW NEW AN ECONOMY?

By any standard, 1997 was a very good year for the U.S. economy. GDP grew by almost 4 percent, well above the 2.4 percent average over the past 20 years. Unemployment fell to 4.6 percent, a 25-year low. Meanwhile inflation remained quiescent, at less ...

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