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Will Asian Woes Tar U.S. Profits?


Economic Trends

WILL ASIAN WOES TAR U.S. PROFITS?

Not likely. But exports may suffer

Six months into the Asian crisis, economists are still debating how the financial meltdown will affect growth in the U.S. Two new studies present a mixed picture: While the collapse of Asian currencies may have a larger-than-expected impact on American exports, profits of U.S. companies could weather the storm. The reason? Foreign subsidiaries of U.S. multinationals make the lion's share of their sales in Europe, not Asia.

Exports' vulnerability emerges in a study done by Andrew B. Bernard of Yale University and J. Bradford Jensen of Carnegie Mellon University of America's recent export boom. From 1987 to 1994, inflation-adjusted U.S. exports grew at 8.2% a year. That surge, coming as American manufacturers streamlined and cut costs, has powered a wave of optimism about U.S. productivity and competitiveness.

But the export boom was not mainly driven by greater competitiveness, Bernard and Jensen conclude. Using plant-level data, they find that rising productivity at U.S. factories accounts for only 10% of the increase in exports. Instead, the dollar's late-1980s depreciation and strong income growth overseas "were the dominant source of the export boom." With the dollar now gaining strength--and Asian consumers on the ropes--their results suggest that U.S. exports could be hit harder than many forecasters anticipate.

Falling exports, however, may not drive down U.S. profits. Economist Joseph P. Quinlan of Morgan Stanley Dean Witter & Co. notes that exports account for only 24% of overseas sales by American multinationals. Those companies sell three times as much through overseas affiliates. And Europe accounts for a whopping 58% of such in-country sales by U.S. affiliates, vs. just 8% for Japan and 8% for Southeast Asia. With Europe poised for an investment-led upswing, "a number of American companies are positioned to escape the pain of Asia via greater sales growth in Europe," Quinlan says.By MIKE McNAMEEReturn to top

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A CASE FOR CUTTING PORK

States keep a sharper eye on costs

Budget hawks on Capitol Hill are trying--with little success--to block a $217 billion highway-and-transit bill. For example, House Budget Committee Chairman John R. Kasich (R-Ohio) would even cut the federal gas tax and let states raise their own levies to fund roads, arguing that this would force states to focus on the best projects.

A new paper from the National Bureau of Economic Research suggests Kasich is on the right track. Alison F. DelRossi of the University of Wyoming and Robert P. Inman of the University of Pennsylvania studied a 1986 law that forced local governments to pay for a larger share of big water projects such as shipping channels and shoreline protection. The result: Overall spending fell 35%, and the federal outlay dropped 48%. DelRossi and Inman suggest that the shift results from "a more efficient balancing of budgetary costs and benefits." Translation: The pork disappears, and only the good stuff remains.By MIKE McNAMEEReturn to top

HIGH SCHOOL GREENSPANS

How kids would handle Fed policy

It won't replace varsity football anytime soon. But a growing number of high school students are participating in an annual competition, started in 1995, to see who can propose the best monetary policy. This year the "Fed Challenge"--sponsored by the Federal Reserve Board and Citibank--drew entries from 208 schools. The five members of the winning team will each collect a $10,000 scholarship, while their school receives a $50,000 grant to establish an "economics laboratory."

Each team must recommend whether the Fed ought to raise interest rates, cut them, or stand pat. Federal Reserve Board Vice-Chair Alice M. Rivlin and two of her colleagues will judge the May 4 national finals, which will require teams to make presentations modeled on meetings of the policy-making Federal Open Market Committee.

Some schools take it seriously. For example, last year's national champion, Bryan (Tex.) High School--one of six finalists again this year--draws support from a schoolwide effort: Trained by their economics teacher, team members get coaching from the drama department and design help for their slides from art and computer students. The team even gets a pep rally as it heads for Washington. Can letter sweaters for economics students be far behind?By MIKE McNAMEEReturn to top


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