Either Man, Recession Is a Sure Bet

As the presidential campaign begins, at least timidly, to focus on genuine economic issues, only one forecast seems highly likely to prove out: The next President will serve a single term. Not long after he learns what all the buttons on all the phones in the Oval Office signify, a recession will loom before his unprepared eyes. As 1988 draws to its end, the momentum of the six-year expansion has begun to flag, and the signs of contraction multiply.

For several reasons, a 1989 or--if the new Administration is lucky--a 1990 downturn, will be unusually severe and protracted. Our experiment in credit card prosperity has blunted both fiscal and monetary policy. Any recession increases federal outlays on unemployment benefits and other income maintenance programs. As business profits and income from consumer wages and salaries sag, tax collections droop with them.

To add to an already swollen deficit, more federal spending, lower taxes or both would terrify investors here and abroad. If the Federal Reserve pushes interest rates down, Japanese and European purchasers of Treasury securities will go on strike. They are the very folks who have fueled our consumption binge, and they can also abruptly end the party.

Added to this glum prospect is the shaky condition not only of the savings and loan industry but of the only marginally sounder commercial banks. A financial crisis is quite possible.

Nor is this quite the end of impending hazards. The orgy of mergers and acquisitions, restructuring and leveraged buyouts has greatly enlarged debt and diminished equity on corporate balance sheets. Common stockholders deprived of their dividends cannot push a corporation into bankruptcy. However, sufficiently aggravated bondholders can exercise their legal right to usher a delinquent enterprise into Chapter 11.

Suppose, against all probability, that no recession occurs for several years. Our next President faces an array of difficult problems whose amelioration will win him no popularity contests. Here is an incomplete list:

- The federal budget deficit must be reduced gradually to avoid precipitating a recession. Current deficits are much larger percentages of national income than has been true in our economic history except during the Great Depression and World War II. Among their consequences is foreign acquisition not only of Treasury and corporate securities but also of American companies and real estate--vineyards and farm land. Creditors call the tune to which debtorsdance.

Our trade deficit seems at last to be diminishing under the stimulus of a cheaper dollar. But even industries that have regained international competitiveness often cannot take full advantage of their good fortune because they bump against capacity ceilings. During the eight sunny Reagan years, investment in tools, equipment and factory structures has fallen well below the historical average and far below Japanese and West German commitments to real capital. Even if we eliminate our trade deficit by 1990 and our foreign debt stabilizes at $800 billion to $900 billion, such sums constitute from 15% to 20% of national income, just about Argentina’s current position. In other words, the interest collected by foreigners shaves from 1% to 2% off any annual growth we may realize.

- The candidates implicitly agree that the decaying infrastructure--collapsing bridges, bursting water mains and deteriorating highways--demands urgent attention. Read: Money.

- Ditto for public education. Our sketchily educated high school graduates compete against far more skilled and literate foreigners.

- A substantial and badly needed shift from consumption to investment will in the short run reduce our standard of living. In the long run, of course, more capital investment implies faster productivity gains and higher living standards, but politics is the art of the next election.

This is not exactly fodder for a campaign that has wasted inordinate time on the non-issue of the comparative patriotism of Bush and Dukakis. Vice President Bush has pledged that he will never, never raise taxes. He invites doubters to read his lips. Gov. Dukakis, slightly more realistically, will invoke the dreaded “T word” only as a last resort.

Bush’s economic strategy is son of the very voodoo that he ridiculed in 1980. His “flexible freeze” will exclude Social Security and defense. Savings will come presumably from Medicare and from what remains of federal social programs.

For the rest, productivity is expected to rise faster and interest rates to fall more rapidly than almost any economist not involved in the Republican campaign considers plausible.

Either candidate, in office, will raise taxes. Painted into a corner by his campaign rhetoric, President Bush will dally and call taxes “revenue enhancements,” patched together out of user fees, import surcharges, a levy on imported oil, greater co-payments by Medicare recipients and other devices. President Dukakis will act earlier because he has allowed himself more policy leeway than his opponent and because he sees more wrong with the American economy and American society than his opponent.

By 1992, either man will envy Jimmy Carter’s popularity rating.