How to Get Growth Back on Track

Fixing the worldwide liquidity crunch has revealed a deep-seated and disturbing problem: What looked like fast growth in recent years was in part an illusion created by excess borrowing

By Michael Mandel

Browse Issues

Browse the BusinessWeek Archive

Guy Billout

Story Tools

• post a comment
• e-mail this story
• print this story
• order a reprint
• suggest a story
• digg this
• save to del.icio.us

Guy Billout

Take a deep breath. The global bank rescue plan is in place, and though the stock market has dropped sharply, the world seems to have avoided another Great Depression for at least the next week or two. Now we have a moment to step back and assess how we got here and where we're going next.

Let's put it this way: The U.S. and global economies were traveling at high speed along a clear track, like an economic bullet train, when we ran into the unexpected credit crunch. Yes, we took quite a bit of damage, but we didn't derail. Now we come to the big questions: Should we simply clear the track and fix the engine—that is, tighten up government supervision and improve financial regulation—and go on our way? Or were we on the wrong track to begin with?

The bursting of the credit bubble suggests that the U.S. and global economies have a growth problem as well as a debt problem. According to the official numbers, economic growth in the U.S. has averaged 2.7% over the past 10 years. But by BusinessWeek's calculation, U.S. consumers have run up about $3 trillion in excess borrowing and spending over the same period—consumption that was not justified by income growth. Without that boost, which translated into new homes, cars, furniture, clothing, and the like, U.S. economic growth would have come in considerably lower. The global boom, too, was artificially fueled by out-of-control borrowing by consumers and businesses. "There was a sense of a bubble not just in real estate, but in that the underlying fundamentals were not supporting the market," says Michael Frantz, a Seattle-based managing director at project-management firm Point B, based on his conversations with clients.

OVER-RELIANCE ON OUTSOURCING

The upshot? A multitrillion-dollar bailout of the global financial sector will still leave us with sluggish growth. George Magnus, senior economic adviser to UBS (UBS), says the industrialized countries would do well to average 1.5% annual growth over the next five years, compared with 2.6% over the previous five. Magnus pegs world growth at 3% a year over the next five years, down from the International Monetary Fund's latest forecast of 4.3%. Those declines are the difference between prosperity and tightened belts.

Can the U.S. and global economies get off the slow-growth track? Yes, but it won't be easy. One key is that U.S. companies have to pay more attention to sustaining productivity growth and innovation at home rather than resorting to outsourcing as their main source of cost savings. That would boost wages and incomes for U.S. workers and reduce the need for the U.S. to take on huge debts to pay for foreign-made goods.

The good news is that the private sector may be moving in that direction already. Dan Warmenhoven, CEO of NetApp (NTAP), a data storage company in Sunnyvale, Calif., says his customers are still buying, but they've shifted their behavior. "They are focused on making investments that reduce costs and increase efficiency," says Warmenhoven.

But the private sector can't do it alone. Policymakers around the world have to help, and that means doing more than simply fixing the global financial system. No matter how counterintuitive it seems today, with markets being bailed out by government action, China and other developing countries must take steps to encourage competition in their service sectors. Lowering prices would boost consumer demand and lessen the dependence of those countries on exports. And when the U.S. and other developed countries try to boost their economies by pumping up government spending, they must direct this fiscal stimulus toward spurring investment and innovation rather than consumer spending.

IMPROBABLE SURGE

In many ways, the strong period of growth that just ended was a surprise. After the dot-com bust of 2001, info tech investment plummeted in the U.S. and took years to recover.