Fueling an Economic Head of Steam : Clinton Must Generate His Own Luck to Hold a Steady Upward Course
If President Clinton looked relaxed while making his second State of the Union address Tuesday night, it was because he has been lucky with the U.S. economy, which is making life easy for him.
Unemployment is now falling and could be down to 5.5% of the U.S. work force by this summer, from 6.4% at present. Yet interest rates are low and probably won’t be raised any time soon.
In fact, an improving business climate could continue for the balance of Clinton’s first term, say economists in Washington. Even Federal Reserve Board Chairman Alan Greenspan is reported to be satisfied with the economy’s non-inflationary progress and to credit Clinton with making his own luck.
That’s nice to hear, but if we are to plan our own careers and investments, we need to understand why Clinton has been lucky and what factors will be important for his luck to hold for the long term.
We can start with business leaders who don’t understand. In a survey published Tuesday, the heads of 280 U.S. companies credited “the natural evolution of the business cycle”--and not Clinton’s policies--for the economy’s generally good performance. But such surveys only show how narrow and dimwitted company bosses can be.
There is no “natural evolution of the business cycle.” In the real world, economies are affected by politics, personalities and changes in world history.
Low interest rates are very important for the U.S. economy at present--and Clinton had a role in keeping them low by fighting and winning a battle for his budget bill last spring. That victory demonstrated to financial markets that Clinton was not going to be a big-spending Democrat. So the markets allowed interest rates to drift lower through all of ’93.
Global markets and weak economies overseas also had an important effect on U.S. rates. With Western Europe and Japan in recession, there is no shortage of capital in the world system. Even the U.S. government’s budget deficit, the focus of anxiety when Clinton took office, has faded from serious consideration.
The deficit will be below $200 billion this fiscal year, less than 3% of the gross domestic product. Germany and Japan, eager to sell into the U.S. market, want no fast action to slow down the American economy. The Clinton Administration plans no such action--and doing nothing has a lot of support. The proposed balanced-budget amendment will face an uphill fight when it comes up in this session of Congress.
Yet one more factor pushing down interest rates is that U.S. banks, after three years of repairing balance sheets, have ample capital and are ready to lend again.
“Low rates have had a powerful effect,” notes economist Barry Bosworth of the Brookings Institution. Car sales have been strong for a year, existing home sales in 1993 were at their strongest in 14 years, and mortgage rates have declined further in early ’94.
But how long can that last? For some time, say professional money managers who do not see the Fed rushing to raise interest rates. For one thing, the economy will look weak in the first month of ’94 because of ice and cold in the East and Midwest and the Northridge earthquake. “Economic statistics will be skewed right into April,” says Terry Rose, a managing director at Advisers Capital Management, a New York firm specializing in fixed-income securities.
She also thinks political pressure from Congress will slow Fed action on interest rates, and the inflation outlook will remain debatable, with grain prices rising but metal prices falling.
More important in the long term is the fact that inflation and interest rates may be low because of profound changes in world industry. Greenspan often talks of a new economy, based not on traditional calculations of economic value but on brainpower and information. The materials in a compact disc, for instance, are worth pennies. But the value of the information that can be put on that disc--a schematic for a road or sewage system--can be worth millions.
When such knowledge is shared easily worldwide, there is inherently greater efficiency in use of materials, which means that costs are lowered and inflation is not as quick to rise. Calculations about the “evolution of the business cycle” are somewhat out of date.
That’s one reason Greenspan is sanguine about the economy: U.S. industry has adapted to the new patterns of industry better than other countries--notably Germany and Japan--which are only now beginning economic restructuring.
Still, questions remain. Not all Americans have the skills to compete in the new information economy. That’s why we perceive the social problems that took up much of Clinton’s speech Tuesday night--the need to get people off welfare, the need to curb crime.
And that’s why Clinton asked rhetorically: “Are our children learning what they need to know to compete in this new economy?”
He spoke of apprenticeship programs and of streamlining “today’s patchwork” of training programs. “The only way to get a real job with a growing income is to have real skills and the ability to learn new ones,” he said.
He has said it before. While campaigning in 1992, he spoke of expansive programs to educate and train Americans for “high-wage, high-tech jobs.” In his first year in office, he abandoned such expansive--and expensive--talk and won low interest rates, which have boosted the economy in his first year and perhaps for the whole first term.
But on Tuesday, he said again that we need to invest more in education and welfare reform for the economy to be good through the ‘90s. Evidently, he wants to be lucky in his second term too.
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