MADE IN THE USA/Joel D. Joseph

Greenspan's Myth

Many commentators give Alan Greenspan credit for our current economic boom. This is the Greenspan Myth. The American economy has a mind and a momentum of its own. Greenspan is entitled to as much credit as President Clinton for our current economic boom: very little. Both have been in the right place at the right time. But the boom is about to bust and Greenspan and Clinton can take steps to ease the inevitable economic downturn. The boom cannot go on forever.

The American economy is strong for six reasons: 1. New businesses, including Internet companies; 2. End of the government deficits; 3. High consumer debt; 4. The seven day, 24 hour economy; 5. Low sales taxes and 6. a booming stock market.

The United States lost hundreds of thousands of middle management jobs during the 1990s due to corporate downsizing. The strength of entrepreneurship in America is the reason that these layoffs led to growth rather than to a recession. These fired business men and women took their early retirement money and started tens of thousands of small businesses. America is still the entrepreneur's paradise. We do not fear change like the Europeans and Japanese do.

In Europe and Japan unemployment rates are relatively high. They both have low consumer debt, restricted economies, very high value added taxes (sales taxes) and especially in Japan, a stagnant stock market. Japan's stock market is about one-half the value of what it was seven years ago. In Japan and Europe most consumers do not pay for cars with small down payments over many years -- they pay cash that they have saved up over many years.

The Japanese model has been for one employee to work for a company for life. Layoffs in Japan are devastating, debilitating. Suicides are more common in Japan than successful startups. The Japanese economy that was the wonder of the world in the 1980s has turned into a stagnant relic of an old economy.

The American economy is in danger for four reasons: 1. Rising interest rates; 2. Increasing margin loans; 3. Inflated stock market; 4. Bloated trade deficit. Alan Greenspan is solely responsible for increasing interest rates. He says this is to prevent inflation. But we don't have inflation now, except in oil prices and stock market levels, especially the tech-heavy NASDAQ. Rising interest rates hits certain segments of the economy more than others. Housing and automobiles are the most interest-sensitive purchases because they are financed over many years.

To deal with stock market overpricing Mr. Greenspan should reduce margin borrowing. Currently investors can buy stock on credit, paying 50 percent of the purchase price. Margin buying was one of the major causes of the 1929 stock market crash. Once stocks started falling, margin calls required further sales and the market went into a tailspin. Hopefully, the same thing won't happen again, but it could. Although margin sales represent only about 2 percent of the total stock market now, compared with 30 percent in 1929, margin holdings are very high in some NASDAQ stocks. The total margin debt in the United States is $265 billion and this has increased by 50 percent over the last year. This is a significant warning sign and the Federal Reserve should act now to reduce margin borrowing.

The Fed shouldn't reduce margin requirements quickly, because that could by itself trigger a market fall. We should reduce margin requirements in steps, first to 40 percent, then 30 percent six months later and so forth. If we eliminate margin buying, the stock market will be less volatile.

The trade deficit is now at about $300 billion per year. This means that $25 billion per month is being taken out of the US economy and put elsewhere. We finance this trade deficit by borrowing from overseas. In other words we are living above our means, both on an individual basis and the economy as a whole.

The recent tripling of the price of oil has been a substantial cause of our trade imbalance. We must get tough with our oil suppliers from Mexico to Kuwait and Saudi Arabia. We recently opened trade with Iran, but the Clinton Administration only opened up our purchases of caviar and carpets. We can do without Iranian caviar and their carpets made by small children. We need Iranian oil.

Besides oil, our major trade deficits are with China, Japan and our NAFTA partners, Mexico and Canada. Most of these deficits are caused by poor agreements negotiated by the US Trade Representative. For example, before NAFTA we had no trade imbalance with Canada and a trade surplus with Mexico. Now we have twin $20 billion deficits with these two neighbors.

To keep the economy from turning South, we need to address the oil problem, the trade deficit and the stock margin issue. Mr. Greenspan and Company must reduce margin requirements gradually over several years. Mr. Clinton and his successor must confront our staggering and increasing trade deficits. The American economy cannot keep chugging along without confronting these issues.

Joel D. Joseph is chairman and founder of the Made in the USA Foundation, dedicated to promoting American products in the United States and around the world. Write P.O. Box 5402, Washington, DC 20016; phone 202-822-6060; email

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