April 22, 2001

We need zero tolerance

Posted in International Economy · 1 comment ·
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When we hear about zero tolerance in the United States, we think of white policemen harassing black motorists, downtown Cincinnati, riots and burnt-out cars. ‘Zero tolerance’ of crime has become one of those American slogans that sum up an attitude.

There is something quintessentially American about zero tolerance that explains why it doesn’t travel well. When an Irish or British minister mentions zero tolerance, he’s more likely to be met with derision than applause. Yet, when Rudi Giuliani did it in the 1990s, he was hailed as a visionary.

In the past few weeks, we have seen another version of zero tolerance policy in the US. Today’s rallying cry is zero tolerance of recession. While other countries may prevaricate in the face of threats to prosperity, the Americans seem to act first and talk later.

There is a certain boldness about this initiative from corporate America, the Federal Reserve and a tax-cutting White House. In November, companies were still expanding, interest rates were as likely to rise as fall and the Treasury was full of talk about budget surpluses in perpetuity.

Today, the opposite prevails without any definitive consensus amongst commentators, experts or soothsayers about the severity of the downturn.

Pessimists talk about a return to the Great Depression and point to Japan in the 1990s where a huge boom led to a ten-year retrenchment. Optimists dismiss the doom and gloom, arguing that the “new economy”, together with lower interest rates and a prospective tax cut, will save the day.

Most commentators are optimists and they have, in the main, been right so far. However, the powers that be in the US are taking no chances.

The way the US is mobilising its resources to fight this internal threat to prosperity with absolute clarity of purpose, raises the question “Who really takes the decisions in America, who runs the place, and how?”

When we strip out all the guff about the new paradigm of productivity and technology, the formula for American economic success appears to be quite simple: America, in contrast to Ireland and Europe, is very “rip-off” sensitive and this largely explains how the economy is run.

Americans do not tolerate expensive land or houses for sustained periods of time. For example, if the return from land falls, farmers sell their land and do something else for a living. Here and elsewhere in Europe, when farm incomes fall, we rarely see farmers selling their assets, even though it would be the logical thing to do. Instead, farmers revert to being landlords.

Farmland is not released onto the market, leading to an artificially constrained supply of land and, consequently, ludicrous land prices.

This very high price of land is equivalent to a tax on production. It is an extra and unnecessary cost on the economy. It is a rip-off, and Americans would not stand for it.

If housing costs escalate in one city, business moves to the next region, dampening the boom and releasing cash for more productive use. In the 1990s, the emergence of the economic phenomenon of the ‘New South’, which centred on Atlanta, was all about the search for good value that dominates US corporate thinking.

Likewise, Americans will not tolerate high interest rates for long. The cost of capital is kept low to grease the wheels. Therefore, the Federal Reserve dispenses with ideology in the face of problems.

Between 1989 and 1991, the Federal Reserve kept interest rates at 3 per cent to ensure that the banking system rebuilt its balance sheet after the savings and loans bank crisis. Issues like the value of the exchange rate which seem to tax other central bankers, particularly those in Frankfurt, didn’t enter the equation. Through the 1990s, the Fed has acted to keep the real economy cruising.

Similarly, the price of labour is always competitive. If the wage rate rises excessively in a region, employers regard it as a tax and businesses uproot.

At a national level, US immigration policy is geared to keep labour costs low. Last month, non-Hispanic whites became a minority in California. There was very little media coverage of this, nor political reaction. White Californians realise a growing economy needs and attracts immigrants and the price of prosperity is a changing ethnic balance. Americans would not tolerate a closed-door immigration policy if it threatened the good times.

The same intolerance of being ripped off extends to the mainstream. Why does a Philips camcorder cost less on 50th Street in Manhattan than in Eindhoven where it was made? Economics can’t explain it. Consumer intolerance can. The US consumer, unlike his Dutch counterpart, won’t be ripped off.

Finally, Americans protect entrepreneurs by valuing and protecting innovation with stringent patent laws. At the same time, the information that drives these discoveries is made as freely available as possible to as many people as possible that the internet and the sanctity of their freedom of speech can guarantee.

These four fundamental pillars — cheap land, cheap labour, cheap capital and freely available information — govern the US and seem to be generally accepted by most Americans as unquestionable.

In many ways, the existence of these basic rules is at odds with parliamentary democracy. As long as the basic rules of the game are followed, politicians exist only for window-dressing purposes. As a result, the endless gridlock which characterises US parliamentary politics has little or no impact on the economy.

Throughout the Clinton boom, the president himself had very little room to follow his electoral mandate actively, and the House and Senate squabbled interminably, neither having much impact on the majority of people’s lives.

The real power brokers in the US are those who can influence the basic rules. Alan Greenspan and his banking buddies — who have shown that when their own personal interests are affected, such as in the LTCM hedge fund crisis of 1998, they will act decisively — rule in a manner that would not be possible in other countries.

Likewise, George W Bush’s Kyoto reversal can be directly traced to the boardrooms of his corporate bankrollers. Leaders of corporate America and their Wall Street advisers can, in the face of a recessionary threat, act savagely and with political impunity, cutting costs to bring profits back on track.

The recent outrage and political backtracking in France to Marks and Spencer’s announcement about the closure of its Paris shops, indicates the vast distance between Europe and the US in this regard. Due to the universal acceptance of the four basic rules, politics in the United States is becoming increasingly irrelevant and this process seems to be unstoppable.

This fact has not escaped the electorate. More than half of eligible voters did not vote in the presidential election. Whether this recession is short or protracted, one thing is clear: when the diminishing US electorate next goes to the polls, the connection between the ballot box and the real levers of power will be more remote than ever.


  1. Alana

    New Yorkers certainly did not glorify zero tolerance methods or applaud Rudy Giuliani as a visionary during his administration. Instead, racial profiling issues came to the forefront, stirring up deep resentment for that administration. We felt as though we lived in a police state and it was clear from polling that Rudy was not a well-liked mayor.

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