The "Enronization" of America
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Moveable Feast
By Thane Peterson
BusinessWeek Online
JUNE 10, 2003
A comparison of U.S. economic and foreign policies with the dirty dealing that brought down the energy giant reveals some troubling symmetries
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Could the U.S. economy go the way of Enron? On the face of it, it's an absurd question. Indeed, with the war in Iraq over, the dollar down, interest rates at historic lows, and business investment showing signs of picking up, many economists believe the U.S. is on the verge of an economic turnaround. Americans might be forgiven if they saunter down the sunny side of the street this summer humming a few bars of that old Bobby McFerrin ditty, Don't Worry, Be Happy.
Bear with me for a minute, however. Even if it's only, say, a 1-in-20 chance that the U.S. could be on the verge of a crisis of confidence worthy of the Enron implosion, the possibility deserves some thought. Let's consider this extreme worst-case scenario if for no other reason than what it says about the country's direction.
Enron's slide began with a seemingly small event -- a writedown in mid-October, 2001, that resulted in a $1.2 billion reduction in its shareholder equity. That, in turn, focused a spotlight on long-standing problems that had previously been ignored. Enron's main weakness: huge, off-balance-sheet borrowing that the energy giant had used to pump up its profits.
CRISIS WATCH. Enron's cocksure top managers were too arrogant to realize the gravity of the predicament they were in until it was far too late. Once investors, regulators, and credit-rating agencies focused on Enron's weaknesses rather than its hype, things quickly spiraled out of control.
What does all this have to do with the U.S.? The war with Iraq may be over, but any number of problems in the news right now could still touch off a crisis. Another terrorist attack or military confrontation in the Middle East or a provocation involving North Korea might do it. Then there's the SARS scare. It seems to be waning, but the disease isn't under control yet.
M. Cary Leahey, a senior economist in Deutsche Bank's New York office, recently published an analysis of the potential economic fallout of a renewed SARS outbreak. His conclusions aren't heartening. Leahey figures that industries accounting for about $1.2 trillion in annual output, or about one-eighth of the U.S. economy, would be "acutely affected," including air and surface transportation, hotels, restaurants, and retailing.
LIVING WITH DISEASE. Over three months, Leahey estimates, an outbreak might result in a 5% reduction in output in those industries, reducing quarterly U.S. GDP by two percentage points on an annualized basis. The good news? He argues that the crisis would probably be short-lived.
"Over time, people would begin to live with the virus, and the impacts on the economy would diminish," he writes. Still, the industries Leahey looks at account for 22.7% of U.S. employment, so there could be significant layoffs if an outbreak lasted very long.
Additional segments of the economy also could be badly pinched. International travel and health services account for a combined 6.7% of gross domestic product. Manufacturing, which accounts for 14.1% of GDP, also might take a major hit from disruptions in the flow of components from overseas and health worries about workers congregating in factories, Leahey estimates.
Even if a renewed outbreak were restricted mainly to Asia, U.S. trade might be severely disrupted in the short term. That's because -- like Enron -- the U.S. has one a lot of outsourcing. Including Japan, Asia now accounts for 28% of U.S. exports and 39% of imports. Last year, China was America's largest trading partner, the report says, accounting for 10.7% of the U.S. total goods imports and 19.2% of consumer-goods imports.
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DIGGING A HOLE. So, let's say a crisis like a SARS outbreak -- or some combination of a SARS outbreak and another shock -- causes a sudden downturn in the U.S. economy. Underlying weaknesses in America have been ignored, dangerously, in my view.
The obvious immediate worry is the federal government's deteriorating financial situation. In two short years, it has gone from projected surpluses to a deficit of around $400 billion for this year alone, as post-September 11 spending on military and homeland security has soared.
This is clearly unsustainable. How can the U.S. fight a long-term battle against terrorism if it already has plunged into such a deep hole of deficit spending? Yet Congress, far from shoring up the national finances, just passed a huge tax cut for the second year in a row without trimming spending by a commensurate amount. As a result, projections are that the nation will now run a $4 trillion deficit over the next decade. To my mind, this is more evidence of reckless Enron-style hubris.
GAMES PRESIDENTS PLAY. Like Enron, the nation is also awash in off-balance-sheet debt. In a commentary in The New York Times Magazine on June 8, Peter G. Peterson, chairman of both investment bank Blackstone Group and the Federal Reserve Bank of New York (and no relation to me), notes that the government's total unfunded future liabilities for Medicare and Social Security are a staggering $25 trillion. Baby boomers would have to set aside 25% to 33% of their salaries over the next 10 years to keep the U.S. system solvent, he says, which clearly isn't going to happen.
Finally, I, for one, hear glimmers of Enron-esque arrogance in the rhetoric and policies of President George W. Bush. He seems to regard even old-time friends of the U.S. such as France, Japan, and Canada as so many pieces on his superpower chessboard. The idea of an Administration going out of its way to reward allies who supported the Iraqi invasion and punish those who didn't strikes me as beyond the pale.
We shouldn't take much solace in the fact that Europe faces a similar overhang, either. If both Europe and the U.S. are plunged into even greater deficit spending 10 years from now, when baby boomers start to retire in large numbers, how can the world economy thrive?
WORLD OF TROUBLE. And America has another worry clouding its future that Europe doesn't -- a huge trade deficit. The U.S. goods trade deficit soared to a punishing $484 billion last year. The weakening dollar may reduce that gap, preserving some manufacturing jobs, but the greenback may still too be high for the trade deficit to be reduced by much. And in an emergency, longtime worries among European and Asian investors and economists about the U.S. deficit might contribute to a crisis of confidence.
Faith in the U.S. abroad already may be waning. A strong dollar has long been a foreign seal of approval for American finance. Other countries agreed to accept inflated dollars in payment for their goods because of their great faith in the U.S. economy. The dollar's fall -- it's down about one-third from its peak vs. the euro -- could be a short-term reaction to slower U.S. economic growth. But then, it also may reflect diminishing faith in America and its future.
Just take a look at international polls. In recent surveys by the Pew Center for Social Research, large majorities of the respondents in Turkey (68%), France (63%), Germany (59%), and Russia (58%), believe that American foreign policy is having a negative affect on their own nations. Among those who take this view, a majority of the respondents blame the Bush Administration, rather than the U.S. generally -- a clear indication that the President might have trouble rallying global support in a renewed crisis.
Could all this add up to a calamity? Even as I try to make the case, I realize the odds are very long against that happening. But I also worry that the Administration and Congress are taking a major gamble with American prosperity -- and it's far from certain it'll pay off.
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Peterson is a contributing editor at BusinessWeek Online. Follow his weekly Moveable Feast column, only on BusinessWeek Online
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