Myth of Moderate Growth: But Just What Is Moderate? : Economy: Over a 40-year period, the nation’s annual economic growth was between 2% and 3%. So why does Clinton disdain this figure?

Once upon a time there was a kingdom where the people were very happy until a fierce dragon took up residence in a cave nearby. Happy people were the dragon’s favorite meal, and he ravaged through the land, eating everyone he could find.

The people thereupon decided that they would try not to be so happy. Over time, they learned that if they stayed only moderately happy, and quite a bit short of exuberant, the dragon would stay in his cave and leave them alone. Once in a while they forgot, but then they would hear the dragon stirring, and would quickly put back on their customary sober faces. After a while, they even got to like it--it wasn’t as much fun as being very happy, but life was calmer.

President Bill Clinton’s economic advisers would love to ratchet up the country’s growth rate, which, of course, would make many people very happy. But whenever the economy looks like it’s getting back on track, the dragon of inflation starts stirring. After some strong economic growth in the last half of 1992, the inflation numbers for 1993--pushing up toward 5%--were looking quite scary.

Two good reports over the past 10 days, however, suggest that the dragon may be settling down again. Producer prices, basically what manufacturers pay for raw materials and energy, were flat from April to May and up only about 2.5% from a year ago. Consumer prices were virtually flat, with only a 0.1% increase, or 0.2% if the volatile food and energy sectors are excluded. These are soothing numbers.

The Administration’s frustration is that the economy is still not growing as fast as Clinton’s advisers would like. The consensus outlook for growth in 1993 is only an “anemic” 2.5%, or, at best, a “moderate” growth rate of 3% or so. Clinton would like to do far better than that--4%, 5% or even more. But whenever he tries the standard things Presidents do to accelerate growth, like brow-beat the Federal Reserve to ease credit, or demand that Congress pass spending bills, the inflation dragon starts rumbling.

Nothing unsettles the stomachs of bond holders more than fear of renewed inflation--or even the possibility of inflation. If lenders worry that their money will lose value while it’s out on loan, they will demand higher interest to protect themselves. Higher interest rates, of course, slow down the housing market, obstruct business investment, increase the federal deficit and cut down on growth. So Clinton is in a box. One month of good numbers won’t make much difference: The price of keeping inflation quiet may be puttering along at an anemic to moderate 2.5%-3.0% growth rate.

The real problem, however, may not be the President’s lack of a magic economic toolbox, but the received idea of what happiness--and achievable growth--consists of. The prevailing notion that 3% growth is only “moderate” doesn’t jibe with the record of the past 40 years. With the exception of one five-year period in the 1960s, 3% growth over an extended period of time is as good as it ever gets. History gives no reason to believe the economy can grow faster than that.

When President Harry S. Truman put the country on a war footing to respond to the emergency in Korea in 1950 and 1951, growth soared to more than 9%, but for the rest of the 1950s, real economic growth averaged only 2.4%. During the 1970s, average growth was 2.8%; during the 1980s, 2.6%. Those numbers may not be exciting, but they’re consistent.

The exception to this is the ‘60s, with an off-the-charts 3.8% annual average growth. But most of that was from 1962 to 1966, when growth was well over 5%; the other five years barely made it into 2% territory. The early ‘60s, that is, remain the only time in the entire 40-year period, 1952-1992, where the growth trajectory departed consistently from the long-term average of about 2.5%-3.0%.

Those five years, unfortunately, have given birth to a rich, and deeply ingrained, political myth--that the secret to rapid grown is activist federal policy-making. John F. Kennedy won the presidency in 1960 with his promise to “get America moving again,” and he brought a high-powered team of activist economists to Washington. The economists, quite naturally, stirred about actively, making all kinds of policies. Growth soared--and an economic legend was born.

But the myth does not stand up under close scrutiny. The fact is that the entire industrialized world boomed in the first half of the 1960s. The postwar reconstruction of Europe and Japan was just coming to an end; U.S. multinational corporations were taking mass-market evangelism throughout the globe, and world trade exploded. Virtually all industrial economies boomed--most of them more vigorously than America’s.

It takes considerable dogmatism to attribute all this to Kennedy’s economists. The centerpiece of the Kennedy economic program, the 1964 tax cut, did not even begin to take effect until the boom was already running out of steam. In truth, the first half of the 1960s was a time when economic policy-making was a lot of fun everywhere--an era when it was hard for economists not to look good.

It’s about time we scotched the myth that presidents can determine the economy’s growth, or the inflation level, or create jobs, or make business more competitive, or any of the other current staples of campaign rhetoric. It’s certainly true that the federal government is the most important single actor in the economy--almost one-fourth of total national product flows through its fingers. But most of that is on automatic pilot, with only a tiny fraction under the President’s direct control.

Even if the President did control the federal apparatus, the economic tools at his disposal are far too crude for “fine tuning.” The fundamental data on incomes, growth and savings are quite gross and often wrong, and it is impossible to forecast the consequences of specific policies. If the Fed loosens credit, for example, interest rates may go down because money is cheaper, or they may go up because investors fear inflation. There’s no way to be sure in advance.

Over the long term, Presidents can subtly influence how national resources get allocated--toward defense, the aged, hearth care. These are important decisions and should get more attention than they do. But over the short term, about the best an Administration can do is not pull any nasty surprises. If we can settle down for the rest of the decade with low inflation and steady 2.5%-3.0% real growth, we may find that only “moderate” happiness is a good place to be.