If you want to get a clear idea of what lies ahead for the economy in 1993, don't look back at old news about America's debt burden or recession in Europe and Japan.
Look ahead and you'll see that the big economic themes in the first year of the Clinton Administration will be the beginnings of medical reform and a livelier business climate thanks to available cash and a renewal of confidence. Recovery will come later in California, likely arriving here in the fall.
Things will get better. But if there's a threat to President-elect Bill Clinton's honeymoon, it comes from abroad--notably from Russia and other chaos-prone states.
Still, most business and financial people these days display rising confidence that the new Administration will get the economy moving. It's an optimism based on cash.
Chairman Tom Frost of Cullen/Frost Bankers in San Antonio sees that his business customers have paid down debt and restored their balance sheets in recent years. They now have liquid accounts and plenty of borrowing power.
But Frost also notes a real reluctance to borrow or expand their businesses. "Confidence is needed," he says. "Maybe this new Administration will give a shove to confidence."
"Companies have spare cash, and lenders do too," echoes Peter Lynch, the celebrated investor who has returned to tutor young analysts for Fidelity Investments. "The economy is primed to go." Commerce Department forecasts of very strong business investment in 1993 support that judgment.
It's an optimism inspired by tough talk, not by cheerleading. Clinton has made a point to talk not only of the federal deficit but about the really big issue behind the deficit, which is mounting expenses for medical care.
It was not idle pique that caused the President-elect, on the second day of his economic conference in Little Rock, Ark., to pound the table and say, "We are kidding each other. We are all just sitting here making this up if we think we can get control of this budget if we don't do something about health care. It is going to bankrupt the country."
That's no overstatement. Incredibly, the United States spends 2% of its gross domestic product--about $115 billion--on medical expenses for people in their last six months of life.
And that in turn threatens a tug of war for resources between older and younger generations, compared to which all other problems "are window dressing," says Albert M. Wojnilower, senior economist at First Boston, the investment firm. By his estimate, more than 25% of the federal budget goes to the elderly now, and medical expenses are forcing the numbers upward.
Clinton, a baby boomer in his middle years, knows an issue when he sees one. He will put his political capital on the line to reform health care, which at about $800 billion in annual expenditure may be our largest industry.
Change will come in the form of cost controls, limitations and rationing in some respects, but dynamic growth in others. A linchpin of the Clinton program will be bringing health coverage to 37 million uninsured Americans. There will be plenty of work for doctors and nurses.
The problem, of course, is paying for the care. One new source of finances that is sure to get a hearing this year are taxes on employer-paid health insurance premiums. Such premiums can run $3,500 to $4,000 per employee per year, so the tax could take $1,000 from the annual paychecks of middle-class people.
Would such a tax clobber an economy that is regaining strength after growing an anemic 2% or less in recent years? No, it would not--it's only the same tax out of a different pocket. Employers are paying premiums now and adjusting wages downward to reflect the cost.
More significant, reform of America's health care mess would boost productivity and spur the economy. The situation now is bizarre. Entrepreneurial activity is held back by the specter of providing health coverage for employees, workers with illness in the family are trapped in jobs, and uninsured patients use expensive emergency rooms for minor illnesses.
We'll hear about other taxes this year. Clinton, for example, proposes raising the tax rate on incomes above $200,000 to 36%. Even that wouldn't threaten the recovery, says Wojnilower, 62, an economist who made a name predicting interest rates in the '70s and '80s. "In my experience, every significant tax increase has been linked to easier money and lower interest rates," he says.
In recent years, interest rates have come down as the economy suffered declining prices for both homes and office buildings--a decline that followed a real estate boom in the 1980s. That's significant, say financial experts. We had an asset-based recession, resembling the financial panics of the 19th Century or the Panic of 1907. And recovery from such recessions is typically slow and undramatic--exactly the U.S. pattern in the last year.
Home prices are now rising in the Midwest, Southeast and some eastern states, notably Pennsylvania. Real estate has stabilized in the Northeast after a five-year decline, but prices are still falling in California.
Nothing lasts forever, though, and California should join the national recovery by this fall, say investment experts, who calculate that the state's economy lags the national pattern by six to 12 months.
The fate of the aerospace business is critical for the state, and that means more than the overall size of the Pentagon budget. California, which lost about 200,000 defense jobs in the last two years, has been slipping also in its share of commercial aviation and civilian space work, says McKinsey & Co., the management consulting firm.
Despite the advantages of a highly skilled work force and an infrastructure designed for the aerospace industry, companies have been moving work out of California because of the state's high costs and complex regulatory environment, says a new study that McKinsey intends as a wake-up call.
With concerted efforts from private business and elected officials, California can maintain its present share of the market--and hold on to $25 billion a year in business and 900,000 aerospace jobs, McKinsey says.
That's not a far-fetched prospect. Southern California companies may well be ahead of the nation in seeing a future for defense work. While others talk only of lower military budgets, firms such as Whittaker and Lockheed are acquiring defense operations that other firms leave behind. Their judgment is simple and clear: In a still-disorderly world, defense will be a good business.
In fact, the U.S. economy will be stronger this year than most people seem to think. Most forecasts see 3% economic growth for the United States, but it will probably be higher--4% or so. That's significant--1% extra growth in the vast U.S. economy means an additional $56 billion in economic activity, which translates into more than 2 million additional jobs.
In other words, with a little luck the U.S. economy this year will regain all the jobs lost during the recession. Under those circumstances, look for a surprisingly strong performance in the stock market. Bond markets will worry over inflation, but interest rates won't rise appreciably.
The picture isn't so rosy overseas. Germany and Japan have been sliding into recession, and there is concern for U.S. exports. But that's not a major threat. Other customers are growing--notably Mexico, which is taking more than $40 billion a year in U.S. goods, almost as much as Japan.
The really big worry is Russia. In the former Soviet Union, "the economy is breaking down," says Richard Conn, a managing partner of the Moscow office of Latham & Watkins, a Los Angeles law firm.
Conn, who helped draw up plans for the economic reforms presented by Finance Minister Yegor Gaidar--whom the Russian parliament rejected as prime minister--says inflation now is 1,000%. The ruble has gone in one year from 60 for $1 to 450 for $1. These figures work out to an inflation rate of 650%.
Unless Russia can pull out of such difficulties, strong men--nationalists, old Communists--will take back power, Conn predicts. Economic and political reforms would be curbed.
Russia would present a tougher face to Europe--and a foreign policy problem that would divert President Clinton from plans for the U.S. economy.
What are Clinton's options? He could send U.S. aid--some of it already authorized by Congress--which would encourage private business investment and support reforms. Still, sending aid to Russia might be hard for a new President in a slowly recovering economy.
But then, hard choices come with Clinton's job, as he takes pains to remind the public.
It was no accident that "Happy Days Are Here Again"--Franklin Roosevelt's theme song from the 1932 campaign--was not played at last year's Democratic Convention, its first omission in 60 years. Yet you may be surprised at the tune you find yourself whistling at this time next year.
The World Economy
The International Monetary Fund projects only anemic growth for 1992 but sees a healthy improvement during 1993. What follows are the latest IMF projections for the worldwide economy. All figures are estimated percent changes, except where indicated.
1992 1993 Real gross domestic product Worldwide 0.8% 2.3% U.S. 2.0% 3.0% Japan 1.6% 2.4% Germany 1.6% 0.6% Canada 1.0% 2.7% Africa 2.0% 3.3% Asia 6.6% 6.4% Western Hemisphere 2.7% 2.0% Eastern Europe -10.4% 2.1% Former U.S.S.R. -18.6% -7.6% World trade volume 4.0% 5.6% Oil prices 0.6% -1.7% London interbank offered rate* 3.8% 3.9%
* In percent rather than percent changed