Sounding Bullish in Facing Hysteria

It’s hard to remember that only a year ago the world was trembling in the shadow of “The Great Crash of 1987.” The economic skies were filled with towering thunder clouds and economists hummed a universal Requiem to the American recovery.

Just a year later, almost no one foresees a recession in 1989, and even the outlook for 1990 is turning cautiously bullish. The forecasters are still hectoring, of course, rather like puritan divines lecturing their slightly irreligious children--the further into the future the hellfire recedes, the shriller the lectures.

There are, however, certain gloomy features of the 1989 outlook that are almost certain to come true.

Hysteria over the federal budget deficit will hit new heights. After an exhausting triangular shouting match among the Bush Administration, Congress and the media, Congress will pass a trivial tax increase, if possible on something distasteful, like prostitution or gambling, and all will go home happy. By the end of the year, the inflation-adjusted government deficit (that is, counting state and local surpluses) will be insignificant anyway.

The financial markets will publicly slit their wrists, possibly more than once, the media will duly roll out the jeremiads and the Administration will promise a “tough, new, deficit-cutting package.” After a few weeks, the markets, pleased at the attention, will return to normal.

Things will be rather better in the real economy.

Booming growth in Western Europe and Japan will help the continued shrinkage of the U.S. trade and current account deficit and ease the political pressures toward greater protectionism.

Capacity bottlenecks that have been raising inflation flags in 1988 will ease in such key industries as chemicals and paper. The Japanese will press ahead with their U.S. manufacturing investments, creating substantial overcapacity in the automotive and related industries.

The Organization of Petroleum Exporting Countries will start flagrant cheating on production quotas by the second half of the year, easing pressures on energy prices and inflation. In the United States, however, wage costs will begin to pick up, offset somewhat by continued introduction of Japanese-style efficiency methods.

All central banks will cooperate to keep interest rates higher than they need to, but not so high as to trigger a panic.

The noisiest events will usually be the least important, and some important developments will be relatively unnoticed.

Leading U.S. and Japanese companies will continue the quiet process of forming global cartels in the aerospace, automotive, computer, finance and other basic industries. West Europeans will begin to take fright--as well they should. U.S. regulators will pretend not to notice, since they will have no idea what to do about it.

Several large leveraged buyouts will fail clangorously, but nothing will happen. Their junk bonds, after much legal wrangling, will be officially converted into equity--what they were anyway. Lawyers and investment bankers will earn large fees in the process.

A number of grand schemes will be introduced for resolving the savings and loan and Third World debt crises; nothing will come of them, and muddling through will remain the order of the day.

As progress toward the major U.S.-Soviet arms agreement gains speed, defense contractors, worried about a major winding down of arms manufacturing, will announce plans for converting weapons plants into civilian businesses. They will not succeed. Of the successful conversions of defense technology to civilian applications, few were by defense companies.

The benign effects of the middle-aging of the average American household head will begin to be noticeable, as personal savings turn up and the trend of entitlement payments turns temporarily down. As the budget deficit fades away, everyone will forget about the 21st Century’s impending Social Security and Medicare crises.

Finally and most certainly, a year from now when economists review 1989 events, those that stand out as most important for both world and U.S. economies will be the ones that all forecasters utterly failed to predict.