Bracing for the Asian Shock Wave

Bracing for the Asian Shock Wave

by James K. Galbraith

AUSTIN -- So far, American workers have been helped, not hurt, by the Asian economic crisis. Prices are down; products like computers and televisions are cheap as rarely before. American stocks haven't fallen, and few working Americans had investments in Asia. More important, the crisis has eliminated fears of inflation and kept interest rates stable, so that our economy continues to grow and unemployment continues to fall.

But this Indian summer of the American Expansion could end soon. Alan Greenspan, the chairman of the Federal Reserve, predicted last week that the economy, hindered by increased competition from Asian imports and declining exports, would begin to slow by June. My colleagues at the Economic Policy Institute, a Washington research group, estimate that the drop in exports to Asia will cost more than a million American jobs next year. Falling Asian currencies also mean a rising dollar, which will hit the pay of those Americans -- like garment and electronics workers -- who compete directly with their Asian counterparts.

Worse could happen. Some American banks, weakened by losses in Asia, may be forced before long to tighten credit at home. The falling prices that now seem so appealing will dampen profits and raise real interest rates, discouraging consumers from spending on cars and appliances. And if the economy then slows, the Federal deficit will start to grow. Given the hard line on the budget that's now in vogue, new debts will surely panic politicians into new spending cuts -- accelerating the economy's decline.

In his State of the Union Message last week, President Clinton urged Congress to respond to the Asian crisis by supporting the International Monetary Fund. But the I.M.F. alone cannot forestall the grim chain of events that might lead to a recession. Its loans, while necessary as a cushion against debt defaults, will never be large enough to restore Asia to its former role as an engine of global growth.

The shock waves from Asia are thus certain to hit American workers. The question is whether we are ready to parry the blow. There are a number of steps that our Government could take to strengthen both our own economy and the world's.

Since 1993, American households have fueled growth through steadily increasing consumer spending, and they have the debt to prove it. Higher wages would help sustain their purchasing power, and for this reason a new increase in the minimum wage is a good idea. But lowering interest rates is the easiest and fastest way to keep consumers in the game. Such a move would counteract the tendency of falling prices to drive up real interest rates, helping businesses as well as workers. It would also help to keep the dollar from rising, and so strengthen our workers in world competition, while helping to ease the crisis abroad. The Fed should cut interest rates now, before the crisis reaches here.

But lower interest rates and higher wages may not themselves be enough to keep our economy growing. Against this contingency, the Government should start preparing now to resume its historical role as the demander of last resort. It should consider strong measures to increase its investment in schools, transportation, parks and museums. It should also be ready, if necessary, to cut taxes for those Americans who never benefited from the credit boom -- for instance, by expanding the earned-income tax credit again.

As for the balanced budget: too bad. But if the economy slows, we'll have deficits again anyhow. Better to act first.

One lesson of the crisis in Asia is that we need, here at home, a Government that works actively to develop our economy -- by raising wages, cutting interest rates and issuing the public debt necessary to meet public needs and to sustain full employment. Only then can we build a stable economy that responds to crises before they engulf us all.

James K. Galbraith is an economist at the University of Texas. His next book is titled ``Created Unequal.''