US Economic Upturn Augurs Well for 1993
THE end of the presidential campaign has cleared the air. It is no longer necessary for Republican economists to boast of a speedy recovery. Nor do Democratic economists feel the need to lament the rapid decline of the American economy.
In fact, economic chroniclers have recently told us that the recession ended in March 1991. That must be one of the best kept secrets of the decade. The newest University of Michigan survey reports, "For the first time in five years, more consumers reported hearing news of favorable rather than unfavorable developments in the national economy."
What does seem to be in store is a steadily growing economy in 1993, one that is expanding at about 3 percent. Although modest for the early stage of a recovery, a relatively slow growth rate has some beneficial side effects. The most notable are low inflationary pressures (also about 3 percent for the year ahead) and limited expectations for rising interest rates.
But, in a Democratic administration, a slow growing economy usually means rising concern about unemployment and emphasis on some sort of jobs program. The incoming Clinton administration has made it clear its response will be an "infrastructure" construction program. Initially, this will take the form of a public works program, focusing on roads and bridges. But ultimately, infrastructure will include expensive high-tech initiatives in high-speed transportation and telecommunications.
In order to finance this special rise in federal spending - and to fund other initiatives - the Clinton planners have already signaled the likelihood of an income tax increase for those earning more than $200,000 a year. It would not be surprising if higher taxes extend beyond that high-saving segment of the population. In order to offset the pro-consumption bias of such action, a partial renewal of tax incentives for investment is in the works.
The existing momentum (or lack of it) in many sectors of the economy will continue to be a dampening influence. The glut of commercial and office buildings prevents an upturn in this type of construction. Similarly, a prolonged decline in defense production is in progress and changes by the new team may only accelerate that downward trend.
Despite the welcome upturn in consumer confidence, households do not set the pace of economic recoveries. That is especially likely to be the case this year because of the limited prospects for growth in personal income. This puts the main hope for economic acceleration on business investment, especially in equipment. With overall industrial capacity utilization below 80 percent, not too much can be expected for this sector. The long-term utilization average (1967-1991) is 82 percent.
Despite the domestic focus of most presidential campaigns, international developments have a habit of attracting the attention of a new president, even one dedicated to addressing shortcomings at home. In the economic sphere, the slowdown or downturn in much of the rest of the world is having a dampening effect on our own economic expansion, limiting the automatic or painless reduction in the budget deficit.
On the national security front, threats to world peace also reverberate domestically, making it more difficult to cut defense spending much more rapidly than envisioned by the Bush administration. These two disparate trends tend to offset each other in terms of impact on the domestic economy.
In any event, 1993 will disappoint both friends and foes of the Clinton administration. The changes, at least initially, will not be as dramatic as campaign oratory indicated - although presidential oratory will be more florid than was Bush's style. Nevertheless, this year will witness the first installment of a more activist governmental role in the economy, but one based on the knowledge that the private business system is the backbone of that economy.