Taking the Long View, the Outlook for U.S. Is Bright

Since 1981, it has become fashionable for Republicans to praise the incumbent President for all the good things that happen in the American economy while he is in office. Simultaneously, Democrats have attacked the occupants of the White House for all the negatives that have arisen.

Both approaches share a common shortcoming: They implicitly credit government and especially the presidency with awesome powers over the economy. But our private enterprise system derives its strength from the fact that most decision making is decentralized. Under these circumstances, let us undertake a more modest task: a midterm review of the American economy during the presidency of George Bush, including a look at the prospects.

It is instructive to describe the conditions under which Ronald Reagan’s presidency ended as a prelude to evaluating more recent developments. Reaganomics was the most ambitious reform effort in the United States since Franklin D. Roosevelt’s New Deal. Its legacy is a fascinating mixture: lower inflation and higher budget deficits, less unemployment and larger trade deficits, fewer strikes and more government jobs, the deepest recession in half a century and the longest peacetime recovery.

Not surprisingly, Bush assumed the presidency in a lower key than Reagan did eight years earlier. Unlike 1981, there was little desire to undo the policies of his predecessor. The Bush Administration has focused much of its attention on incremental changes in the budget.

The good news is that the Bush Administration and Congress have jointly attempted to wrestle seriously with the huge federal budget deficits. That has been obscured by the messy way in which the decisions were reached. There is no need to endorse every part of the recent budget compromise, however. I would have preferred far more emphasis on cutting spending and less attention to tax increases.

There was little debate over the need to reduce the deficits; no one on either end of Pennsylvania Avenue could defend the fiscal status quo. Instead, the deliberations focused on specific tax increases (e.g., on gasoline) and specific spending programs reduction (e.g., in Medicare).

The bad news, as cynics quickly point out, is that the deficit continues to rise. The combination of savings and loan bailouts and a weak economy is pushing the Treasury’s annual borrowing to the neighborhood of $300 billion. Fiscally, that is a rough neighborhood.

Economic forecasting today requires a special blend of heroism. In addition to analyzing trends in the economies of many nations, it is necessary to make a prognostication concerning military actions in the Persian Gulf.

A successful conclusion to the Middle East crisis would bolster business and consumer confidence and contribute to economic expansion. If the standoff continues, any upturn will be more moderate, as would the Federal Reserve’s response to a soft economy. Of course, an extended shooting war would force forecasters back to the drawing board.

Because these military developments do not show up in the clearest crystal ball, it is more useful to concentrate on matters beyond the current business cycle. The advent of the first recession in eight years is hardly a time to extol the economic policy of a sitting President. Without downplaying the pain that arises during downturns in the economy, let us look across the valley to the next recovery.

Four factors make for continuing long-term strength in the American economy. In a burst of nonpartisanship, I do not assign Bush exclusive responsibility for these positive trends:

* The transition from Cold War to Hot Peace. Recent events in the Mideast underscore the stubborn fact that we live in a dangerous world. Despite the buildup of force in Saudi Arabia, the pace of military contract awards in the United States continues downward. The reduction in defense jobs for highly skilled people is initially painful. But the return of these vital resources to the civilian economy will provide the opportunity for investing them in productivity-enhancing activities.

* The shift to private sector research and development. For the entire post-World War II period, the federal government was the primary R&D; decision maker in the United States by virtue of financing most of the projects to be undertaken and choosing who would do the work. Since 1981, however, the amount of money spent by the private sector to finance R&D; has exceeded the government’s outlays.

Thus, most R&D; now performed in the United States is sponsored by business to meet its needs and, ultimately, consumer demands. As a result, the 1990s are bound to witness improved production processes and a heightened flow of new civilian products.

* The restructuring of American business. In response to foreign competition and domestic takeover threats, many companies have restructured and downsized their operations. Simultaneously, they are giving new attention to quality production of the items they sell. The upshot is a reduction in the cost of producing goods in the United States. A substantial depreciation in the value of the dollar since 1985 has reinforced this trend and is making American goods more competitive.

* The second Renaissance of Western Europe. Industrialized nations are the best customers of other industrialized nations. Thus, the economic integration of the European Community by the end of 1992 (EC-92) is creating enhanced market opportunities for American firms.

Strong U.S. firms with established presences in the EC will do well. Many European companies, no longer protected by national trade or regulatory barriers, fear that this new competition from the larger, better capitalized and higher-tech U.S. firms. Moreover, the American companies tend to have more experience in selling to continentwide markets.

A great many small and medium-size American companies, however, are unprepared for EC-92. Their unanticipated new competitors probably will be the larger and more productive European companies that will enjoy economies of scale in serving the expanding EC marketplace. Fewer than half of all American companies have heard of EC-92. Of those that have, only a modest portion have established strategic plans to respond, either offensively or defensively.

In the larger perspective, we can anticipate that--like Japanese competition in the auto market--a more virulent band of European competitors will force American companies into another round of productivity-enhancing actions.

In short, although Congress has not outlawed recessions, short-term problems should not cloud the economy’s bright long-term skies.