As 1987, a year of volatility and turmoil, recedes into history, we enter a new year laced with as many great uncertainties. Last week, the staff of the Organization for Economic Cooperation and Development in Paris issued a report that amounts to an indictment of the major governments for failing to cope with underlying economic problems.
By coincidence, the OECD report came just hours before the seven rich countries' issued a communique on the outlook for the world economy after the October stock-market crash.
Where Treasury Secretary James A. Baker III and his opposite numbers in Japan, West Germany, Britain, Italy, France and Canada indulged in self-congratulation on their recent "policy intentions and undertakings," the OECD report said bluntly that if the Group of Seven fails to take bolder action, we might see another stock-market dive.
"Prospects for activity would then be worse; indeed, prolonged or acute financial-market turmoil could even carry with it the risk of a recession accompanied by higher interest rates," the OECD report said. And what the OECD spells out in diplomatic (but clear) language is echoed more derisively in financial markets.
Not surprisingly, the ministers -- key political leaders for financial affiars in their countries -- had a different, more upbeat view than the nonpolitical civil servants who comprise the Paris OECD secretariat.
To be sure, the problem is massive, and U.S. Treasury officials grumble privately that those who demand decisive action don't have to grapple with the real political world. A senior administration official, briefing reporters on the G-7 "Telephone Accord," was asked if markets wouldn't expect more economic policy initiatives. He said wearily:
"If you had a meeting every day and came up with new policy actions every day, they would still want more. Economic policy is not made that way. In the real world, that's not the way it works."
Yet, in a sense, today's crop of critics is being more realistic than the politicians. They know that the huge American trade deficit won't be erased simply because finance ministers and central bankers declare that the dollar has declined enough.
The crux of the problem is that among the world's Big Three, the United States, West Germany, and Japan, there are huge and persistent trade and current-account imbalances. The United States has the deficit, the others have the surpluses. Two years ago, Baker initiated an effort at the Plaza Hotel in New York to crunch those imbalances by toppling an overvalued dollar. But after enormous exchange-rate shifts -- for example, an appreciation of the Japanese yen against the dollar by more than 80 percent -- the problem remains.
In their new "Telephone Accord" released on Tuesday, the G-7 powers admitted that "the major external balances" persist and must be corrected. And they promised to intensify coordinated efforts to bring them down.
But all too clearly, the political will to get the job done is not present anywhere. In the United States, a $79 billion budget-deficit "reduction" package is being celebrated, even though it will not reduce the budget deficit in fiscal 1988 or 1989 from the actual result in fiscal 1987.
The West Germans, kicking and screaming, have agreed to reduce interest rates and to launch a small fiscal stimulus program, in an effort to boost economic activity at home and reduce reliance on exports. But according to the OECD estimate, the real German growth-rate will stall at 1.5 percent in 1988 (the same as 1987), then dip to 1.25 percent in 1989. Alone among the major powers, Japan has taken significant fiscal measures, but its trade surpluses are expected to persist.
In sum, says the OECD, the major powers have not done enough. By the end of 1989, the impact of a sharp drop in the dollar on the American trade deficit will have spent its force. The U.S. current-account balance -- which includes services as well as goods -- will have dropped from $156 billion this year only to $134 billion in 1988 and will still be $105 billion in 1989. The German and Japanese surpluses will be down only slightly, and the Taiwanese and Korean surpluses will be growing.
Morgan Guaranty economist Rimmer de Vries joined 32 of his colleagues the other day in warning against an effort to stabilize the dollar -- unless the major powers make additional moves to cut these trade imbalances. He calculates that if an effort is made to stabilize the dollar now, there will be dire consequences. Among them:
-- A trade deficit rising from an estimated $150 billion this year to over $200 billion in 1995.
-- A current-account deficit swelling from $156 billion this year to $430 billion in 1995.
-- A jump in interest rates, close to double digits, that will boost the interest cost on the national debt from about $150 billion in 1987 to $285 billion in 1995.
The bottom line is that 1988 promises to be another year of intermittent financial crisis, even if recession is averted. In an election year, we well be living dangerously, with Oct. 19, 1987, as a reminder that anything is possible. Happy New Year!
(c) 1987, Washington Post Writers Group