The U.S. Economy: Basking in Luck : Falling Oil Prices Have Helped, but Debt and Deficits Persist
It may be almost time to dust off the old saw about how the Good Lord takes care of fools, drunks and the United States of America. Almost, but not quite.
The country is being treated to an extraordinary run of optimistic economic news.
Unemployment is down. Falling oil prices are paying off in lower prices at the gasoline pump, and are exercising a restraining influence on inflation generally. Many experts see lower interest rates and more robust growth in the months ahead.
Economists are now predicting a downturn in the federal budget deficit, even if Congress and the Administration can’t screw up the courage to cut spending or raise taxes. Some analysts are sticking their necks out and predicting an improvement in American industry’s ability to compete on world markets.
So far, the hard facts haven’t caught up with the general air of optimism.
The economy grew only 2.3% last year--the weakest performance since 1982--and was even more sluggish in the last quarter. In January, personal income of the average American was off a shade. And, as has been the case for many months, a major factor was the nation’s soaring trade deficit, which was getting worse instead of better as the year ended.
This country will have to be smart, lucky--and fortunate enough to have trading partners endowed with the same traits--to make the cheerful prognostications come true. But there is a reasonable chance that it will happen.
Keep in mind the background: Since Ronald Reagan moved into the White House in January, 1981, the national debt--the cumulative difference over the years between what the government has collected and what it has spent--has doubled because higher defense expenditures have not been offset either by cuts in domestic programs or by higher taxes.
With every passing day, the burden becomes larger. And even if the budget was balanced tomorrow--and nobody imagines it will be--the country would be stuck with annual interest payments of more than $140 billion. That’s about half the size of total defense spending in the current year.
The trade deficit has reached equally worrisome proportions. Last year this country bought $148.5 billion more in goods and services from other countries than it managed to sell. The pain has been especially sharp in manufacturing industries, which have lost hundreds of thousands of jobs to foreign competition.
The loss in manufacturing employment has been offset numerically by creation of new jobs in service industries--such things as laundries, fast food outlets, advertising, insurance and banking. But on average these jobs don’t pay as well. As a result the huge trade deficit, which hit a record high rate in December, constitutes an enormous drag on the economy as a whole.
Suddenly, however, economists are revising their forecasts of economic activity in 1986 sharply upward. Some go so far as to predict a return to the kind of recession-free, low-inflation conditions we last enjoyed in the late 1950s and early 1960s.
The biggest source of the new optimism is the collapse in oil prices. The development is a potential disaster for the economies of Texas and other big oil-producing states, as well as for banks with big oil loan portfolios.
Overall, however, the drop in energy costs should mean lower oil import bills, more money for consumers to save and spend, more money for business to invest in new factories--and, consequently, more jobs across the board.
What makes the decline in oil prices especially sweet is that it happens against the background of a declining dollar. The biggest one reason for the big U.S. trade deficit has been the strong dollar, which helped to make U.S. goods cost more and foreign goods cost less both in this country and foreign markets. In recent months the tide has turned.
The dollar has fallen more than 30% from its peak 1985 level against the Japanese yen, and has declined substantially against most other major world trading currencies as well. In practical terms the effect is the same as imposing higher taxes on foreign competitors while giving American exporters a tax break.
It will take awhile for the full impact to be felt. But already Japanese auto makers and consumer electronics manufacturers have begun to raise their export prices, and such actions are expected to gather momentum as the year goes on.
The Reagan Administration is forecasting an early fall in the U.S. trade deficit. And a Washington trade consultant reflected a growing sentiment with his comment to the Wall Street Journal that, “We are at the beginning of a very visible improvement in our industrial competitiveness.”
The sobering thing is that neither the Reagan Administration nor American business can take much credit for the improved outlook. The oil price collapse resulted from a global oil surplus. The decline in the dollar was encouraged by the Administration, but it wouldn’t have happened without the help of the Japanese, who have deliberately allowed the yen to float upward and have begun to deal with the fundamental need to reorient their economy from over-dependence on exports.
Although it is unlikely, the global oil surplus could vanish if war broke out in the Middle East or if members of the Organization of Petroleum Exporting Countries managed to get their act together again.
The dollar could rebound--with detrimental effects on U.S. trading prospects--if financial markets again lose faith in the ability of Congress and the President to control the federal budget deficit.
Another vital question is whether Japan can be counted upon to keep up the good work as higher export prices cut into their foreign sales and raise the specter of recession in the Japanese economy.
In other words, as frequently happens with fools and drunkards, too, the United States of America may run out of luck. For the moment, though, it’s nice to know that things are looking up.
