What's Right.(Column)

Tear Down This Wall

President bush has got himself some new economists -- and within a very few weeks, his next State of the Union address will unveil a new economic policy. It's widely expected that this new policy will emphasize new reductions in federal taxes. That's fine. But it's not enough -- not nearly.

The biggest problem the American economy faces in January 2003 is found outside America. While Americans are working their way through a not especially severe cyclical recession, the rest of the world economy is sunk in a prolonged and frightening slump.

The news from Europe and Japan is bad; the news from China is worse; the news from Latin America is worst of all. Argentina has defaulted on its foreign debt; Brazil looks ready to default at any minute; Venezuela hovers on the verge of civil war; Colombia has plunged right over the verge.

In the 1990s, the stock market boomed not just because U.S. corporations were earning more money, although they were. The market boomed because U.S. investors were willing to pay higher and higher prices for those earnings. The old rule of thumb was that a company is worth about 10 times its earnings, maybe 15. In the 1990s, investors willingly paid 20 and 30 times earnings.

Why pay so much more than ever before? Because the future seemed so much more glittering than ever before. The Cold War was won and socialism was discredited. The threat of war that had hung over Americans' heads with only brief interruptions since 1914 seemed finally to have ended forever. From Budapest to Beijing, from Bombay to Brasilia, nations that had isolated themselves from the capitalist world hurried to rejoin it.

So when you bought a share in Coca-Cola in 1995, you were not just buying a share of Coke's existing earnings. You were buying a share of all the earnings that beckoned from the Coke-deprived nations of the world's emerging markets. What could be more bullish?