Samuelson on '85: pluses for US economy, good world outlook
How does Ronald Reagan's landslide victory change the outlook for the United States and the world economy? The Reagan triumph came as no surprise at all. For at least a year all the economic indicators that bear upon a presidential election had proclaimed loudly that the Republican incumbent would win decisively. The sampling polls confirmed this expectation, leaving as a question mark only the quantitative extent of the electoral majority and whether Reagan's popularity would rub off on Republican candidates for the two houses of Congress.
The new information we have learned from the actual election is that Mr. Reagan is personally even more liked than had been thought, and that in his second term he must still face a House of Representatives controlled by his Democratic opposition and a Senate that enjoys a bare Republican majority.
* New portents: What does this add up to as far as the economic outlook is concerned? Here are my readings of the evidence.
1. The year ahead will see positive economic growth, but at a rate that will be but a half of that registered in calendar years 1983 and 1984. The official administration projection of 4 percent per annum real growth from now until 1988 is overly optimistic and should not be bet upon. The odds are 2 to 1 that 1985 will be a year of growth recession rather than of outright recession.
The supply-siders' claim that the economy will grow at more than a 5 percent pace for enough years to wipe out the enormous budget deficit just lacks credibility.
2. Before the election, I guessed that President Reagan would fail to press for enough new tax revenues to reduce the fiscal deficit significantly. The smashing victory improves the odds for such pessimism.
Can the Republicans use their new prestige to force some spending cuts? Yes. The chances now look better for some success along this front. But don't expect much. The American people have shown they really do not regard the structural deficit as an evil of the first magnitude. Main Street will not force Washington's hand on this issue. Washington is itself divided on the matter.
3. Earlier I suspected that a value-added tax might be in the cards. Now its probability has to be scaled down. What then about the chances of some kind of a ''flat rate'' tax?
Conservatives would love this. A cynic must agree that many poor people who will actually be hurt by a flat-rate tax are so fed up with taxes that they can be persuaded to go along with the conservative cause.
But don't expect deficit reductions from adoption of a flat-rate tax. The theory of such a reform is that we get rid of deductions and complicated differentiations of tax rates, trading them in for low and uniform marginal tax rates.
Experience, however, shows that the voters will never give up their right to take deductions for home-mortgage interest, charitable donations, and long-term capital gains. So if we do get a flat-rate tax, it will probably end up a revenue loser, not a gainer. Little hope for budget balancing from this direction.
4. Now that the recovery is getting old and weaker, interest rates may well sag. And, at long last, the dollar could begin to float downward. Both such moves would be favorable for the world economic outlook. Their likelihood provides the basis for reasoned hope that an outright American recession may be avoidable in 1985.
* The second Reagan term: Now the President can more confidently be his true conservative self. He can appoint the Supreme Court justices who think as he does. And the time when Paul Volcker leaves the Federal Reserve Board cannot be far distant. To replace him, Ronald Reagan can appoint a monetarist or a radical-right supply-sider, depending upon which set of advisers then happens to have his ear.
The election shows that the American people are in a self-confident and patriotic mood. They want the Soviet Union to know that we are a powerful adversary. It is again legitimate to be selfish and aspiring.
So much for psychology and mood. That doesn't mean that US productivity is displaying any great leaps forward. That doesn't guarantee that fixed investment will continue to be high, once profitability begins to languish and plant capacities are found to be redundant or even comfortable.
Enthusiasm for the ideology of free markets does not itself make for booms in equity shares and capital gains on bond portfolios. The history books do not record especially good times for speculators and investors during Republican administrations. Returning from trips to both Europe and Asia, I am struck with how fortunate we Americans are in the economic problems we face in the 1980s.
The deficits in government and international trade are serious, but they aren't afflictions that lead soon to depressions or inflations. We have not solved the problem of inflation, but for the present, OPEC prices are weak and worldwide harvests are reasonably favorable. The US unemployment rate will stay too high during the mid-1980s, but the inheritances from the New Deal mitigate the amount of human suffering that this entails in an affluent society.
In economics, the election solved nothing except to show that the rhetoric of the post-Roosevelt Democratic Party no longer captivates the public's mind. For people abroad, whose well-being depends in part on how our economy behaves, an American political stalemate may on the whole be not such a bad thing.