Not the Best Economy, But Not the Worst
TO paraphrase Charles Dickens: This may not be the worst of times, but it surely is not the best, either. Although current economic statistics constitute a mixed bag, it is hard to find support for the Clinton administration's claim that this is the healthiest economy in 30 years. Ironically, the same folks who wouldn't admit that a real economic recovery was under way in 1992 are reluctant to acknowledge that in 1996, that same recovery is now old and tired.
Gross domestic product, the most comprehensive measure of the economy, grew a modest 2 percent in '95. The prevailing forecast for '96 by experienced private forecasters is more anemic - 1.9 percent (even the inflation rate is higher, at 2.3 percent).
In the past, the US economy has experienced far more rapid growth while inflation was held in check. In 1984, GDP grew 6.8 percent, and the GDP deflator (measuring inflation) rose 3.8 percent. In 1966, economic growth was 6.4 percent, and the deflator rose a modest 2.8 percent. Even in 1992, the year of supposedly nonexistent recovery, GDP increased by 2.1 percent (and inflation 3.0 percent). If '92 was not a year to write home about, it's hard to see how '96 is sensationally better.
When we dig below the surface, we find a number of economic concerns. The growth of productivity, a key to rising living standards and international competitiveness, has dipped from 3 percent in 1992 to an average of 2 percent since. Not all sectors of the economy are participating in the recovery. Real farm income is down from $40 billion in '92 to an average of $33 billion more recently. Consumer bankruptcies are hitting new highs.
But again, this isn't the worst of times. Unemployment has been declining, and so has the budget deficit. The economy is neither going down the tube nor is it a candidate for the Guinness Book of World Records. The economy can do much better.
The sharp rebound in Southern California - which has offset the painful decline in defense employment - is an especially heartening indicator of our nation's future potentials. This strategic region has been registering rapid increases in jobs in computers, software, entertainment, and biotechnology. This positive development is not a response to public-sector initiatives but to the resourcefulness of the private sector. In retrospect, we should be glad that the pressures for expensive federal defense "conversion" initiatives were in the main ignored.
Several policy prescriptions would help achieve a faster rate of economic growth in a constructive manner - that is, increase living standards without arousing the inflationary beast.
Policymakers should take an economic equivalent of the Hippocratic oath: First, do no harm. The US economy will only suffer from brave new government spending programs or tax increases or regulatory expansion. A significant amount of today's unemployment results from the phenomenon of "the discouraged employer" - discouraged from hiring more people by a thicket of byzantine workplace regulations and costly mandates.
My standard advice to policymakers still stands: Don't just stand there, undo something. Economic performance will improve if Congress undoes complicated taxation and burdensome regulation and reduces growth of federal expenditures. Such structural reforms will increase the flow of saving for new investment and encourage creation of new and improved products and production processes. The healthier economy will reduce pressure for new government programs. The result? An economy with greater productive capacity that can grow 3 percent a year or faster - providing a higher level of sustained employment.
Policymakers need to take account of the fact that the United States is part of an increasingly global economy. Isolationism and globalization are simply incompatible. The rapidly growing business-oriented international economy is a source of great actual and potential benefit to American entrepreneurs, workers, and consumers.