The Key to ‘93: Use Patience to Offset Politics

Some things you can count on this fall if, as looks likely, Democratic candidate Bill Clinton is elected President: The deficit will rise and so will interest rates. Bond prices will fall amid widespread fears of inflation.

Indeed, that’s already happening--prices of U.S. Treasury bonds have fallen for four straight trading sessions.

But don’t panic. Inflation fears will prove unwarranted, and interest rates should come down again as the country works itself out of a long and confusing recession. The best advice now is hold onto your hats, no matter who is elected.

The Democrats these days are supremely confident, planning to start work the morning after election on legislation to spur the economy. A Democratic leader of the U.S. Congress, in a private conversation this week, recited the post-election agenda: “Job creation, health care reform and lowering the deficit.” If George Bush wins, the agenda might be different, but the goal would be the same.

Problem is, the economy will not respond quickly or easily because this is no simple recession. The economy is at a watershed, a time of profound change not seen for almost 50 years. Political parties may speak of grand programs, but they’re groping like everybody else.

Even Alan Greenspan, the chairman of the Federal Reserve Board, said recently that he is mystified that “old rules of thumb” don’t seem to apply in these times.

But don’t be intimidated. Ordinary people are capable of understanding what ails the economy, what the remedies are and how long the convalescence will take. Simply recall when school exams were approaching and you hadn’t studied. You might pray for a miracle, but your chances of success were slim.

The U.S. economy is in a similar fix because private business investment has been lagging for more than a decade and has slid dramatically since the mid-1980s. As a percentage of gross domestic product--the economy’s total output of goods and services--private investment is at its lowest point since World War II, says economist David Levy, vice chairman of the Jerome Levy Economics Institute at New York’s Bard College.

Private investment is critical because it produces business profits, which in turn finance the hiring of employees and the development of new products that are the lifeblood of a healthy economy. Lately, in the absence of private investment, the $350-billion federal deficit has kept the economy on life support--meaning that unemployment is under 8%, not 25% as it was in the 1930s.

To be sure, other trends have worked to stall private investment. The 1980s saw a burst of borrowing and investment in mergers, acquisitions and real estate. “It got so bad, the bank would lend you money even if you had no visible means of paying it back,” recalls investment banker Michael Tennenbaum, head of West Coast operations for Bear Stearns. The aftermath of such excess is not profit and growth but overcapacity, declining real estate prices and business failures.

On top of that, the Cold War’s end has created a surplus of defense plants, which are now closing and idling thousands of well-paid employees. Auto plants too are in surplus, and car industries are downsizing in Japan and Europe as well as the United States.

All those trends explain why the recession is persistent and nasty--and why it will take all of 1993 to climb out. Profits may not be robust, so stock prices may back and fill. But inflation will be dormant, so interest rates will fall and bonds should rally.

The remedies, especially if Clinton wins, will be government investments to give the economy a shove. Money is already appropriated for public works--$161 billion for highways and mass transit approved last year in the Surface Transportation Act. Some of those funds will be brought forward to create jobs in an emergency.

Meanwhile a $20-billion rise in tax payments in early ‘93, as the lower withholding that President Bush introduced in 1992 is reversed, will reduce the deficit--while also reducing consumer take-home pay.

Nonetheless, the deficit will rise short term as Clinton starts pumping $20 billion a year into infrastructure. Long term, however, a better term for such spending would be capital investment because it lays the groundwork for new business.

In 1954, President Eisenhower began the Interstate Highway System, the massive public investment that led not only to the rise of highway builders such as Peter Kiewit Sons and Morrison Knudsen, but to the growth of the U.S. trucking industry and of Holiday Inns and other motel chains and to the blossoming of cities and suburbs everywhere. The ripple effects of investment are incalculable.

New infrastructure investments will include telecommunications lines and satellites. Jane Jones Enterprises, a small temporary help firm in Nashville, Tenn., can give you an idea of the returns those investments might generate.

Jones wants to link a bunch of low-priced computers through modern telephone lines in order to teach her temporary workers better reading and communications skills so they can command higher-paying assignments. If she succeeds, their increased earning--and tax-paying--power will amount to a return on the public investment. You don’t have to be an economic expert to understand that.

The upshot: Don’t be frightened in what is likely to be a tough and confusing year ahead in the U.S. economy. You understand more than you realize.