Unstoppable Economy Has a Mind of Its Own
At the end of the 1980s, the book that dominated the bestseller list and scholarly discussion was Yale historian Paul Kennedy’s pessimistic “The Rise and Fall of the Great Powers.” As the 1990s end, what dominates are sunny titles like “The Millionaire Next Door.”
The sea change in Americans’ reading habits offers one way to gauge how unexpectedly well the U.S. economy performed during the decade--and how poorly many of the country’s most prominent politicians and policy thinkers did at predicting it.
“If you were really astute during the early 1990s, you could have seen we were at the dawn of a new innovation cycle,” said Rep. Dick Armey of Texas, the House’s deeply conservative majority leader. He conceded, “I didn’t.”
Neither did such pivotal figures at other points along the political spectrum as Robert B. Reich, the liberal former Clinton administration Labor secretary, and Pete Peterson, a prominent investment banker who led the centrist charge against deficit spending.
Indeed, if there is a recurring theme to the decade, it is of the nation’s blasting past limits that most experts said could not be breached and continuing to grow despite the nation’s refusal to adopt most major policy prescriptions for growth.
The 1990s offer a cautionary tale about the unlikelihood of getting it right when it comes to predicting the course of something as complex as the U.S. economy. That makes the decade a powerful argument for what can be called the “few big things” view of government.
“The lessons of the 1990s 1/8are 3/8 that Washington needs to get a few big policies right, like interest rates and fiscal policy, and then let the economy go where it goes,” said Mark M. Zandi, chief economist of RFA Dismal Sciences Inc., a West Chester, Pa., economic forecasting firm.
The dizzying difference in outlook between the start and finish of the 1990s suggests something else: namely, that the current conventional wisdom about the economy should be met with a certain measure of skepticism. Among candidates for a careful look:
* That a New Economy is replacing the old. (Even by generous measure, the computer, software and telecommunications industries account for less than 10% of the nation’s economic output.)
* That the high-tech sector is immune from such old-fashioned constraints as supply and demand. (Maybe. But as anyone buried in ads for new online shopping sites this holiday season can attest, there is a case to be made that a supply glut is just around the corner.)
* That the nation faces a looming crisis as the baby boomers retire. (If the New Economy is doing so well, why can’t it afford to pay for the boomers’ old age?)
Of course, not everybody got the 1990s wrong and not all policy proposals proved useless or dangerous. American investors, for one, were much more optimistic about the chances for growth and much earlier than the prognosticators.
The stock market rally of the decade had its unlikely start on Jan. 17, 1991. It was the day the United States and its allies launched the Persian Gulf War. Interest rates and oil prices were at 10-year highs. The country was slipping into recession. But the Dow Jones industrial average, then around 2,500, rose and has barely stopped rising, closing Friday at a record 11,405.
“Investors saw things most economists missed. They realized the end of the Cold War, deregulation and the computer revolution were all wildly bullish for growth,” said Edward W. Yardeni, chief economist of Deutsche Morgan Grenfell, one of the first major analysts to predict the Dow would hit 10,000 by the end of the decade.
Fed Chief Let Economy Roar
Alan Greenspan got it right. Starting in 1996, the Federal Reserve chairman chose to disregard early warnings of a pickup in inflation and let the economy rip, though he has issued cautions on occasion about excessive growth and the possibility of inflation. He has been rewarded with annual growth rates twice those that most experts until recently thought possible.
Some Washington policy moves, although typically not the ones that garnered most of the public attention at the time, also hit the right spot. The government’s cleanup of the nation’s banking and savings and loan industries after the real estate collapse was widely considered a sorry, scandal-ridden affair that people would rather forget. Only after Japan’s inability to dig itself out of its economic hole has it begun to seem like one of the decade’s great policy triumphs.
“Japan has the same technology as we do and their investment rates have been consistently higher. What they don’t have is a banking system that works,” said Roger M. Kubarych, a former senior Fed official and Wall Street banker who is now a senior fellow at the Council on Foreign Relations. “We fixed ours, they didn’t.”
But for every expert whose predictions proved right, hundreds of others turned out to be wrong. And for every policy that worked, scores either failed or were exposed as unnecessary after the economy boomed without them.
Understanding why requires returning to the late 1980s and early 1990s, when many policymakers and pundits were talking about defeat even as the U.S. was achieving one of its greatest foreign policy victories in the collapse of the Soviet Union.
Greenspan, for example, warned that the nation faced an “extraordinarily difficult environment” in the early 1990s of a sort “not seen since before World War II.” Liberal economist Paul Krugman predicted the coming decade would be an “age of diminished expectations.” Writing earlier, Kennedy, the Yale historian, had begun asking, “Can we decline as gracefully as Great Britain?”
The pessimism stemmed from many things: disappointment in the Reagan revolution and high-tech’s then-unfilled promise; worries that the economic growth of the 1980s had been hollow and inequitable; lingering fears about the 1987 stock market crash and the real estate collapse in the early 1990s.
And it had one very profound effect: It produced a string of spectacularly bad economic assessments that influenced how average Americans viewed their prospects and what policymakers thought was needed for much of the decade. The problem went well beyond routine matters like predicting annual growth rates, although economists’ record on this score has been particularly dismal. (In each of the last four years, the majority of forecasters predicted the economy would grow 2%. In each, it grew 4%.) It affected almost every major debate in Washington during the 1990s on taxes, spending, deficits, even some aspects of foreign policy. And at least from the vantage of the decade’s end, it appears to have distorted every one of them.
Taxes. For most of the decade, conservatives have preached that tax cuts could cure almost anything that ailed the country and that tax hikes were the surest route to recession. They have waged a series of gargantuan battles with President Clinton that brought the government to a grinding halt for several weeks in 1995. According to Armey, almost all of their efforts have been wasted.
“Raising and lowering taxes doesn’t matter that much when the economy is this dynamic,” he said in an interview. And as a political matter, he added, “it doesn’t ring anybody’s bell.”
Armey, once Clinton’s fiercest critic, labeled the president’s 1993 deficit-reduction bill “a recipe for disaster” that would “cripple” the country. Now he says his criticisms were off base, the result of his failure to appreciate the economy’s true strength during the 1990s. And he suggests that while Republicans would still have opposed the president on taxes, the debate might have been considerably less bitter had he and others realized earlier how well the economy was doing.
“Bill Clinton could have confirmed all my worst fears, but with economic dynamics like these, he still couldn’t have screwed the thing up,” he said. ‘We’ve never seen anything like this in our lifetime.”
Spending. Clinton won the White House in 1992 by promising to help the economy do something that he clearly suggested it could not do on its own--grow again after the recession of the early 1990s. Following his liberal campaign advisor, Reich, he proposed a “stimulus package” to rekindle growth and a 1% payroll tax to fund a massive new job training program, as well as additional spending on roads, schools and research.
Once elected, he dropped or failed to win passage of almost all of these proposals. Still the economy surged.
That does not shake Reich’s faith in “public investments.” The former Labor secretary, now at Brandeis University, conceded recently that the economy had proved more resilient than he had expected. But he asserted that the government must still play an activist role.
For Reich, a Matter of Priorities
“Our failure to invest adequately in education and training is going to come back to haunt us,” he said. “The gains of the 1990s have been extraordinarily lopsided and, unless we invest, we’re not going to change that.”
However, other liberals, such as University of Texas economist James K. Galbraith, have adopted a substantially more modest view of the government’s role. Galbraith has argued that growth alone has done so much to help working people that keeping it going must be Washington’s priority, even if it is at the cost of public investments.
“Keeping growth going is the single most important priority,” Galbraith said. “If growth everything that’s been achieved can disappear quickly.”
Deficit. Washington’s success at deficit reduction is widely cited as one of the great accomplishments of the 1990s and a key contributor to economic growth. But the deficit debate of the decade was riddled with miscalls about the economythat arguably made it harder to reach a deficit deal.
In books and articles, deficit hawks like Peterson drummed home the idea that overspending could only be fixed with Castor oil solutions like 50-cent hikes in the gas tax and drastic cutbacks in Social Security and Medicare.
“I remember we talked about there being another option, which was economic growth,” said Robert L. Bixby, executive director of the Peterson-founded, anti-deficit Concord Coalition. “But we never thought there would be enough that we wouldn’t need to do the other things.”
In fact, growth, coupled with moderate spending cuts and tax increases, solved the problem, although Concord’s leaders came to the realization slowly. Bixby said the group only early this year acknowledged that Social Security and Medicare cutbacks were not needed to erase the deficit. It is still pushing the cutbacks but now says they are necessary to help the programs cope with the baby boomers’ retirement.
Global competition. A substantial number of American policymakers and commentators spent the early years of the decade convinced that the nation was losing a high-technology race with Japan and other competitors. They insisted that Washington must jump in on the U.S. side by subsidizing technologies and even snapping up key high-tech companies before foreigners could buy them.
The entire episode appears to have involved such a spectacular misreading of both the American economy and those of key foreign competitors that it is being quickly forgotten even by some of the very organizations that pushed for a U.S. “technology policy.”
“I have more confidence in the ability of private capital markets to develop technology than I did five years ago,” said Andrew Szamosszegi, an official of Washington-based Economic Strategy Institute, one of the earliest groups to claim that Japan and other Asian nations posed competitive threats. “It’s hard to look back on the 1990s and say that the United States had it all wrong.” Indeed, it is.
