The Sky's The Limit

Caution and vigor rarely travel in tandem, but TIME's Board of Economists called for hefty measures of both as members looked at the prospects for a dynamic world economy. Global megamergers, lofty stock valuations, the exponential growth of the Internet--the salient features of the dawning 21st century are a welter of challenges for the world's investors, business leaders and workers. No one doubts that the future is volatile. The question is whether--and for whom--volatility translates into vulnerability.

The good news is that the sheer urgency of change is a symptom of unprecedented vitality in the U.S., Europe, much of Asia and pockets of the developing world. The U.S. economy has been booming along for more than four years at an average of 4.2% growth, and the Board saw that trend continuing in 2000. Now the rest of the world is picking up steam. The pace is by no means even, of course. Some regions, like Latin America, are up against forces they cannot control; others, like Japan, are wallowing in the economic trough of the past. The overall outlook is heady. But only the deft will prevail in this supercharged economy. More than ever, even the most nimble are ultimately at the mercy of American shareholders, who could wake up one morning soon and decide that the stock market is for the birds.

TIME's economists were unanimous, however, in arguing that the pressures of the present should not divert attention from the big challenge of the future: aging populations that can't expect adequate support in retirement from moribund social-security systems. If anything, businesses, tax regimes and pension schemes need to change faster to meet those burdens.

Many companies are girding for the future by bulking up to unprecedented size. Robert Hormats, vice chairman of Goldman Sachs International, noted that in 1996 there were 211 corporate megamergers (deals worth $1 billion or more) around the world, valued at $1.2 trillion. In 1999 there were 476, worth $3.8 trillion. One of the main spark plugs for the trend was the new European currency, the euro, which encouraged companies to grow outside national borders. Last year more than 60% of the world's megamergers involved European companies. "We're likely to see more megamergers and more countries involved," Hormats predicted, "because the Asians haven't got into the game yet, and they have to."

The fat fees that flow to the investment banks from those deals will continue to beef up their bottom lines. But all elements of the financial-service sector--indeed, all intermediaries in the economy, from auctioneers to arbitrageurs--need to remind themselves daily that their hallowed brands and array of services will not fend off the challenges of the Internet.

Laura D'Andrea Tyson, dean of the Haas School of Business at the University of California, Berkeley, and chairman of the White House Council of Economic Advisers during the first Clinton Administration, pointed out that the Internet is starting to roll through financial industries as it has through American retailing. Big brokerage houses like Morgan Stanley Dean Witter and Merrill Lynch are launching online services against burgeoning upstarts like Charles Schwab and E*Trade--just as Internet-based brokers start to offer subscribers such customized services as video interaction with financial advisers. The losers? Maybe neither. "These new approaches aren't displacing anyone," said Tyson, "but allowing more of this to occur than could otherwise."

That's the idea, anyway--a new economy that adds new value. It has worked in spades in the U.S., which last week marked its longest period of expansion in history, with unemployment figures (currently 4%) that most European countries can only envy. Hormats predicted more of the same this year. He gave a share of the credit to the Clinton Administration's drive to pare the U.S. budget deficit, which has succeeded beyond anyone's wildest fantasies. Among other things, he noted, the fiscal achievement turned what government economists in the mid-1990s projected would be a $400 billion deficit in fiscal 1999 into a $120 billion surplus. At the same time, individual stock-market investors are behaving almost like professional venture capitalists, ignoring short-term profits--or the lack of them--in favor of long-term gains. "There's been a real strengthening of equity culture," he said.

Unfortunately, another effect of the boom has been to raise consumer debt and the U.S. balance-of-payments deficit to alarming levels. These have added to the inflation concerns of Federal Reserve Chairman Alan Greenspan, who on Feb. 2 jacked up interest rates another quarter of a percentage point. Further tightening could spook an increasingly jittery stock market, and the pressure for a bigger boost remains strong. Much of America's current wealth could evaporate with stunning speed. Despite big average increases in disposable income, Tyson pointed out, "savings rates are still declining, and no one knows what to do about that in any country."