NEWS ANALYSIS : Slow Growth Seen Plaguing Economy for Years to Come

Even if the recession that now clouds George Bush’s political fortunes ends before next year’s presidential election, a host of underlying economic problems are likely to plague the nation long after November, 1992, affecting the lives of millions of Americans and the political climate for Democrats and Republicans alike.

No matter which party wins the election, the next President appears likely to confront a daunting reality: The United States, the pre-eminent economic superpower of the 20th Century, is heading toward the next century severely weakened by an unprecedented, decade-long government borrowing binge and an uncompetitive industrial base withered by years of low investment and overloaded with debt.

Financially exhausted by the massive defense buildup of the Ronald Reagan era, the nation appears ill-equipped to take advantage of the commercial opportunities now opening as a result of the collapse of communism. In the words of Democratic presidential candidate Paul E. Tsongas: “The Cold War is over, and Japan won.”

Moreover, while most economists believe that low inflation will be the rule in the years ahead--offering stability for consumers and an opportunity for business to rebuild its competitive base--it may be accompanied by potentially unsettling trade-offs. Although prices seem likely to remain stagnant, many analysts fear the same is true for wages, home values and the traditional growth that has conditioned many Americans to expect steady improvement in their standard of living.

“I think it is extremely unlikely that we will still be in a recession on the eve of the election in October, 1992,” observed Harvard political economist Robert Reich. “But the long-term issues will still be there.”

To be sure, not all economists subscribe to the slow-growth scenario described by Reich and others. They note that during the late 1970s and early 1980s, when the outlook for the economy seemed similarly bleak, many analysts were predicting a decade of low growth and declining living standards. Those predictions proved erroneous, and some say the current consensus could be shattered if there is a sharp turn in federal tax and budget policies or a dramatic change in investment and spending priorities in both the public and private sectors.

Even so, many economists are convinced that the enormous debts run up in the 1980s will restrict public policy so much in the 1990s that Washington is unlikely to have the resources to mount bold new initiatives to deal with the nation’s lingering woes. Washington is getting crushed under a budget deficit roughly eight times the size of the one that presidential candidate Reagan railed against as unacceptably large at the end of the 1970s.

At worst, a stagnating economy could polarize politics in the 1990s so much that Washington will become mired in endless class-based squabbles. Those kinds of battles already seem likely to dominate the 1992 presidential campaign, as Democrats push for a populist solution such as a middle-class tax cut financed by higher taxes on the rich, while Republicans seek to stimulate the economy by lowering capital gains taxes, which are paid primarily by wealthy Americans.

“America is not good at dealing with a shrinking pie,” argues Barry Bosworth, an economist at the Brookings Institution in Washington. “Our whole system is based on the idea of endless economic growth. But that ain’t gonna happen in the 1990s.”

In fact, many economists are predicting that the American economy will probably grow by an anemic average of only 2% to 2.5% per year over the coming decade, well below the levels needed by the federal government, at current tax levels, to finance existing programs. Economists say that slow labor-force growth, coupled with sagging investment and savings rates, are combining to put a damper on the prospects for sharp gains in productivity and economic growth.

Such low growth rates, if they occur, will seem even worse to Americans who have become accustomed to the boom times of the 1980s.

“If we have low inflation, but no growth, that won’t do much for the economy,” observes Richard Rahn, former chief economist with the U.S. Chamber of Commerce.

That dilemma seems likely in the coming years to lead to worsening conflicts between the Federal Reserve Board and the rest of official Washington.

The Fed, now dominated by anti-inflation hawks, seems prepared to sacrifice rapid growth in order to wring inflation completely out of the economy for the first time in a generation; analysts believe the Fed won’t be satisfied until the rate of inflation is beaten down to the point where it consistently stays between 2% and 3%.

That’s about the level at which Fed Chairman Alan Greenspan believes inflation will no longer matter, because consumers and businesses will no longer take it into consideration while planning for the future. Yet Congress and the White House are apparently willing to accept inflation rates of 4% to 5% in return for lower unemployment and faster growth. And, if a more activist Democratic President occupies the White House in 1993, the friction with the Fed will certainly get worse.

George Bush already is dealing with the political fallout from this new era of low inflation and low growth.

Inflation is the only real bright spot. After spiking up to 6.1% in 1990 as a result of rising oil prices, the inflation rate has plunged to just 2.9% this year. Most economists now expect prices to rise by about 3.5% next year.

But reining in inflation has won few plaudits for Washington in the middle of a recession. In fact, many sectors of the economy have become so accustomed to ever-rising prices that millions of Americans stand to lose as inflation wanes.

While economists insist that lower inflation is still a positive for the economy, it may be hard to sell that idea to homeowners or other real estate investors, or even affluent senior citizens who have large certificates of deposit to roll over this fall. “A lot of people in our economy have bet on high inflation,” observes Donald Ratajczak, an economist at Georgia Tech University. “And so there is going to be a lot of pain as inflation goes away.”

So, while the public shrugs off the good news on the inflation front, Bush finds himself losing ground politically because of the slump.

Indeed, of all the economic statistics pouring out of Washington these days, one stands out as posing the biggest threat to the White House: So far, Bush has posted the weakest economic growth rate of any President since World War II.

Since Bush came into office, the nation’s gross national product--its total output of goods and services--adjusted for inflation, has risen by just 0.5%, which is even below the 3% annual average posted during the Jimmy Carter Administration.

The next 12 months are not likely to bring much respite for Bush. After contracting by 0.4% this year, the economy is expected to grow slightly in 1992, but only by about 2.3%, according to the latest consensus published in the Blue Chip Economic Indicators, a newsletter that surveys leading economists. That would make the coming recovery one of the weakest since World War II.

In addition, almost all economists are in the process of downgrading their forecasts, as each fresh bit of economic data points to further deterioration. Late last week, after the Labor Department said new claims for jobless benefits soared to their highest levels in seven months, University of Michigan experts warned that the economy now has a one-in-three chance of sliding back into the second half of a “double-dip” recession.

“At the moment, it looks like we never left the recession,” said Allen Sinai, chief economist at the Boston Company Economic Advisers, a forecasting firm.

Unfortunately for Bush, most of the economy’s current problems are rooted in the debt-fueled boom of the 1980s--when he was Ronald Reagan’s vice president. By 1992, the federal debt will surpass the $4-trillion level for the first time in history. Interest on the debt, which now accounts for 14% of federal spending, is the fastest-growing single category in the budget. And, despite last year’s five-year budget agreement, which was supposed to finally bring spending under control, the deficit is expected to hit a record $362 billion in 1992.

Faced with such severe budgetary constraints, Bush has very little room to maneuver on economic policy.

“The legacy of the 1980s is very troubling for George Bush,” argues political analyst Kevin Phillips, the author of an acclaimed book on the Reagan era. “Ronald Reagan had the boom, and George Bush has the bust. Since the peak of the Reagan boom in 1987, we’ve had the unraveling of junk bonds, savings and loans, the banks, commercial real estate . . . they have all come unwound on George Bush’s watch.”

Reagan loyalists often stressed in the 1980s that debt didn’t matter as long as the economy was growing faster than the federal deficit.

But economists now caution that Washington won’t be able to count on economic growth to bail the government out of rising deficits in the 1990s. Instead, the harsh new economic realities mean that the pressures for higher taxes, both at the federal and state levels, will only become more intense as the 1990s wear on.

“The truth is simply that we are no longer paying enough taxes to pay for the kind of government services that we demand,” notes Bosworth. “But neither the Republicans nor the Democrats have any long-term strategy to deal with the economy.”