European Affairs

Spring 2000

 

Is the "New Economy" on the Wrong Track?
Reviewed by Carola Kaps

With the longest peacetime expansion in the history of the United States, with productivity accelerating, with employment at a 30-year low and inflation not in sight, America is on a roll! Good times are here and - as the Council of Economic Advisors just recently assured the public - are bound to continue.

Even Alan Greenspan, the Chairman of the Federal Reserve, who is trying desperately to sneak away the "punch bowl," so that the economy will produce a benign soft landing, waxes about the "New Paradigm," with the country experiencing a virtuous circle of new investment, rising productivity and rising profits.

Driven by the new information technology and thanks to the information age, America's future has - so it seems - never looked so bright.

Enter Mr. Eamonn Fingleton! In his new book, In Praise of Hard Industries, he throws cold water on the American love affair with the information age, points to the many shortcomings of the country's new digital economy and openly questions the rose-colored picture of the strength of the American economy currently in fashion.

Contrary to the official view out of Washington, he believes that the United States is heading toward a competitive crisis caused by the emphasis on such postindustrial activities as computer software, telecommunications, information and finance. In his view, these activities cannot be sustained. With the active support of the government, the country should be concentrating instead on advanced manufacturing industries.

Moreover, the government should take all necessary precautions so as to block the "leakage of world-beating production technologies abroad." Tariffs, he argues, should be used to allow industries a reasonable return on their investments and protect highly productive and well-paid jobs.

As in his previous book, Blindside, Fingleton, a former editor at the Financial Times, Forbes and Euromoney, talks about the hidden strength of the Japanese economy and its capability to expand its manufacturing industries despite the general and continued weakness of its financial sector.

He marvels as well at Germany, Switzerland, and Singapore, where rock solid commitment to manufacturing continues to hold the key to the strength of the economy, producing at the same time strong exports and well-paying jobs for workers. In all three countries - Fingleton says - the three key essentials for the economic and social well-being of any advanced nation are fulfilled: a wide range of jobs, strong exports and high wages.

In contrast, complains Fingleton, America places its hopes for a more prosperous future on such services as computer software, entertainment, the internet services and finance, which are - as recent experiences have shown - highly vulnerable to piracy as well as to low wage imports.

As somebody who dares to swim against the stream of conventional wisdom, Fingleton might be applauded for his provocative arguments; persuasive, however, he is not.

First, it can hardly be argued that America is abandoning manufacturing or that there is a continuous de-industrialization taking place. In his book there are quite a few, very convincing references to industrial strength and excellence in the heartland of America, which has made an admirable comeback after a devastating recession and a highly overvalued dollar delivered a double blow during the eighties.

Even the ever complaining, ever protectionist steel industry has reinvented itself. There are quite a few American manufacturing industries which have no trouble holding their own in the highly competitive international marketplace.

Secondly, what is one to make of the admiration for Germany, where industry is racing to play catch-up to the information technology and where good industrial jobs have been protected by ever increasing government subsidies at the price of steadily increasing structural unemployment?

Thirdly, would America really be better off, if consumers had to pay higher prices to buy the home-produced goods of industries which are protected by higher tariffs? Would it serve the American interest or, as a matter of fact, the interest of the world if Americans spent less and saved more and supplied fewer dollars to the financial markets?

Even if the answer were yes, it is hard to see how America could turn itself into a manufacturing giant by following Mr. Fingleton's advice. The action plan put forward in the last chapter of his book is disappointing.

Policy prescriptions like "boost the nation's savings rate, more productivity enhancing industrial investment, tariffs, better education and skills or the blocking of transfer of production technologies" are neither original nor promising.