No Economic ‘Fix,’ Please
Adecade ago, many leading prognosticators were doubtful about the continued health of the U.S. economy. They were wrong. Today the economic outlook for the coming decade is mostly sunny. The forecasters could be wrong again. Economic forecasting is risky. But not as risky as “fixing” a robust economy through legislation or government interference. As long as Federal Reserve Chairman Alan Greenspan keeps an eye out for key warning signals, such as a tight labor market or rising commodity costs, and the government maintains a prudent fiscal policy, the economy will develop its own dynamic.
For a number of economists, the American Century ended in the 1980s when Japan was believed to have overtaken the United States in wealth and technology. The age of “diminished expectations” was afoot. This led to calls for huge subsidies for new technologies to restore America’s economic supremacy. But the American Century was not over. Today, the United States is more dominant in technology and economic muscle than at any other time. Japan, by contrast, has declined.
As staff writer Peter G. Gosselin reported in The Times on Sunday, Rep. Dick Armey (R-Texas) predicted in 1993 that President Clinton’s deficit reduction bill was a “recipe for disaster.” It wasn’t. The economy has turned a huge budget deficit into a big surplus. Armey too is eating crow.
The 1987 stock market crash reminded investors that the market is subject to periodic corrections. Greenspan famously warned of “irrational exuberance” in late 1996 after the market more than tripled in value from the January 1991 level. But the Big Board kept climbing and closed Monday near record levels.
The analysts’ befuddlement has given birth to theories of a New Economy, which, propelled by technological innovation, defies the ups and downs of economic cycles. That might prove dangerously optimistic.
Clearly, the expectations that the economy will continue to boom are high--reflected in many technology stocks--and as those expectations rise even further, so do the risks. The shakeout in the Internet stocks early last fall is a good example of what can happen.
The $185-billion Christmas shopping spree serves as a reminder of how dependent the economy is on continued consumer spending. Normally, consumer spending accounts for two-thirds of the economy, but lately this number has risen to 95%. The fickle consumer, who is already spending more than he earns, could hurt the economy either by bingeing or staying at home. The consequences of either could be devastating.
There is a cloud on the flip side of the silver lining. This is not the time to “fix” the economy with big tax cuts, as proposed by the leading Republican presidential candidates, or big government spending plans, as proposed by their Democratic presidential rivals. A dollop of caution is in order.
