Economists Play ‘Happy Days’ as Many Sing Blues

Imagine a utopia of next-to-no inflation, a fantasy land of declining deficits, a dreamscape of rising job prospects and new opportunities.

Sound like an economist’s mad ravings? In fact, these visions are now held by various authorities on the U.S. economy who describe underlying conditions--and future prospects--as the healthiest in 30 years.

“We’re back to 1964,” said Rudiger Dornbusch, an economics professor at the Massachusetts Institute of Technology, referring to the time before rampant inflation, oil shocks, exploding debt and relentless federal budget deficits. “The challenge is to give better answers than we did back then.”

“I see rebirth, revival and renewal,” said Allen Sinai, chief economist at Lehman Brothers Inc., a financial services firm in New York. “The economy is the healthiest I’ve seen since the early 1960s.”

The rave reviews may sound crazy to the millions of Americans scraping by with low wages or none at all. Jittery investors can point to rising interest rates as reason for doubt. In recession-weary Southern California, the soaring optimism may seem downright bizarre.

Yet for all the skeptics, an unusual array of evidence seems to make the case that the U.S. economy is on a roll.

Inflation is at bay. The deficit is declining. Factories are churning. Productivity is rallying.

American firms are winning battles in the global marketplace after years of getting whacked, while Japan and Germany struggle with a morass of financial woes.

On top of all that, the 1980s’ legacy of debt-ravaged companies, households and banks is fading.

It all could mean that a period of prolonged prosperity is approaching, goes the cheerful view, a new chapter unhindered by debt and other hobgoblins that have weighed down the economy for years.

“I don’t recall as good an underlying base for the long-term outlook . . . in the last two or three decades,” Federal Reserve Chairman Alan Greenspan told members of Congress recently. An “extraordinary achievement” is how he described the state of affairs.

The achievement hasn’t been cost-free. Nor does it belong to any one Administration, economists agree, although many credit President Clinton’s deficit-cutting plan last year as a helpful contribution.

The U.S. economy, it seems, has answered its detractors with an unexpected burst of resilience since the trouble-plagued 1970s and 1980s.

From automobiles to computers, entertainment to finance, U.S. industries are powerful players once again, reflecting what Dornbusch calls “a quantum jump” in the nation’s competitiveness.

Earlier this month, for example, the government reported that worker productivity increased at a solid 4.2% rate in late 1993 and that labor costs actually fell. In the 1990s so far, productivity has been growing at about double the pace of the past two decades, fueled largely by manufacturing, the Labor Department reported.

Japan, by contrast, has registered practically no advances in productivity since 1992, while Germany’s labor costs have rocketed at almost twice the U.S. rate, according to the WEFA Group in Bala-Cynwyd, Pa.

“Our competitive position is probably better than it has been at any point since the early 1960s,” said Steven S. Roach, a senior economist at the Morgan Stanley Group Inc., an investment banking firm in New York.

Yet if these are the good times, millions of workers might wonder why they don’t feel better.

In graphic contrast to past recoveries, U.S. companies have enhanced their ability to compete in the world by slashing payrolls, loading up on labor-saving technology and restricting hiring.

Employers announced nearly 109,000 job cuts in January alone, the highest monthly toll in at least five years, according to a survey by Challenger, Gray & Christmas, an outplacement consulting firm. Last year, employers announced 615,000 layoffs, according to the firm.

America’s economic rivals, meanwhile, are just beginning that unpleasant exercise.

“Germany is perhaps 10% of the way into this restructuring, while we’re perhaps 75% to 80% of the way there,” said Ross DeVol, an economist for the WEFA Group. “Japan is just starting to cope with it.”

Now some of the same experts who applauded the corporate slash-and-burn drive say it’s time to shift into a phase of building and creating, a strategy that should spawn well-paying jobs. Otherwise, they argue, companies risk gutting themselves and undermining the broader economy in the process.

“The risk is that we fixate too long on cost-cutting and downsizing,” Roach said. “It’s time to move into an era of rebuilding and renewal.”

A January survey by the American Business Conference, a coalition of fast-growing, medium-size firms, hints that at least some growth is in the works. Almost half the firms surveyed--47%--expect higher wages for workers early this year. Another 45% anticipate rising business investment, and 25% foresee increased hiring.

“What we’re seeing here is an extensive rate of growth that finally is broad enough and deep enough to increase the demand for new hires,” said Barry Rogstad, president of the coalition.

It is the nature of the growth, more than the rate of growth--which is expected to exceed a respectable 3% this year--that has some experts so excited.

In contrast to the red-ink epidemic of the past, many families are improving their financial health these days. An index of household finances, which considers debt burdens, interest payments, disposable income and other variables, has improved by 27.5% since the low point in 1990, according to Lehman Brothers.

A similar tale emerges from the corporate world, where companies are finally putting the 1980s’ legacy of debt behind them.

Interest charges, as a share of overall cash flow, are now just 60% of the level they were a few years back.

Other pluses jump out, according to Robert F. Wescott, a senior economist on the White House Council of Economic Advisers: lean business inventories, signs of emerging income gains, solid spending by consumers--all at a time when federal spending has fallen as a share of the economy.

In other words, a wide range of efficient private enterprises are driving the recovery, which bubbled along at a 5.9% rate in the final three months of 1993. “It’s not just one strong quarter of economic growth,” Wescott said. “It’s the whole story of the economy that feels so good.”

Oddly enough, even the trade deficit can be seen as a sign of U.S. strength. That is because the expanding U.S. economy last year pulled in $115.8 billion more in imports than it was able to sell to customers in weaker economies overseas.

Wescott and others say they anticipate a helpful kick to the U.S. recovery around 1995, when Germany and Japan may break out of their slumps and start buying more U.S.-made products.

Nonetheless, the view that a golden economic era beckons is more a matter of faith than an accepted fact.

Doubters cite the nation’s low savings rate and troubled school system as reasons to be skeptical. It is only a matter of time, some say, before U.S. rivals emerge from recession and mount economic comebacks of their own.

White House critics worry that Clinton’s goals for health care reform and worker training could saddle employers with higher labor expenses, wiping out much of the progress in cost-cutting.

Even businesses’ rising equipment outlays--up 15% last year--raise questions, because much of the money has gone for information technology, which saves labor, rather than bricks-and-mortar expansion, which stimulates the need for it.

“I’m not terribly bullish on the economy,” said Allan Reynolds, a conservative economist at the Hudson Institute in Indianapolis. “I think there might be a short and weak expansion.”

The public also is wary. In a Los Angeles Times Poll last month, 58% of respondents said the nation remains in recession. Another 54% said the country was generally moving on the wrong track; 36% said it was on the right track.

“People are deeply concerned about these fundamental issues, the lack of progress in real wages, the relatively high unemployment rates,” said John P. White, director of the Center of Business and Government at Harvard University’s Kennedy School of Government.

But if the optimists prove right, the implications are staggering.

America’s weaker regional economies, notably Southern California, would gradually be pulled forward by a stronger national locomotive because local firms will be able to sell more products and services to the rest of the country.

More broadly, a stable prosperity would afford the United States greater maneuvering room to concentrate on a long list of social needs.

“It means we can focus on other issues--like education and crime and welfare reform and health care,” Dornbusch said. “The economic issue is quickly becoming a non-issue.”

Certainly, a host of troubles could sabotage the picture: A full-blown trade war with Japan, political instability in Russia or China, a new oil price shock, a U.S. policy miscue or an unexpected burst of inflation are just some of the possible booby traps.

But those dangers aren’t new. What’s noteworthy is the no-holds-barred enthusiasm from some who have monitored the economy’s ups and downs for years.

“Everywhere I look, I see signs of health,” said Sinai, who has advised both the Clinton and Bush administrations. “For years, everywhere I looked I saw signs of growing sickness. It is a pleasure to report.”