Economy is singing its recovery tune - with some strange variations
Cambridge, Mass. — The novelist Tolstoy may have been right when he claimed that all happy families are alike. But economies can be more complicated even than people, and the present Reagan recovery has some very paradoxical features indeed. America's financial developments are being watched more carefully than usual and with some puzzled anxiety.
Actually, the pace of the present United States recovery does continue to be normally strong. Yet no one seems to believe that. Every time the Federal Reserve lets interest rates rise a little, headlines warn that the recovery in residential housing may soon come to an end, entailing around the corner a premature ending to the expansion.
As I read the evidence, our boom is not that fragile. It is still in its early stage. Equipment and plant investments are finally beginning to pick up.
So long as Ronald Reagan does not back out of the presidential race, and provided his military initiatives abroad do not turn so sour as to frighten the American public, the business community will go on being optimistic. Not since Calvin Coolidge has business found a president so much to its liking and to its financial interest.
What then is so strange about our present expansion? Here are its five unusual features.
1. Enormous deficits. Reaganomics talks the rhetoric of conservatism. What it brings is large deficit spending, beyond the heights dreamed of by Harry Hopkins and other Roosevelt New Dealers.
Tax rates have been cut, and cut again. No wonder strong consumer spending brought the 1981-82 recession to an end and staunched the decline of corporate inventory investment.
2. High real rates of interest. Canny Wall Streeters expect that there will still be a $100 billion structural deficit when the system reaches high-employment levels in the mid-1980s. They realize that Americans no longer save much and that the government's need to finance its deficits will compete with industry's investment needs.
The result? Higher interest rates ahead - and, in a marketplace where speculators must look ahead or perish, that means higher interest rates now.
3. Balance-of-trade deficits. Europe, the Middle East, and the Pacific basin are attracted to our juicy interest rates. They dump marks, francs, and yen, thereby bidding up the dollar.
American exporters find they can't compete once foreign investors bid up the dollar to a level that is overvalued from the current-account viewpoint. American imports soar, killing off manufacturing jobs at home.
In effect, foreign countries that are still poorer than us are the ones who are financing the American budget deficit wrought by Reaganomics.
4. Favorable inflation trends. So far, so good - the recovery has not produced a reacceleration of inflation. To help preserve jobs that might otherwise be lost to the Pacific basin, real wage concessions are still being made.
Except for aluminum, most metals are still in plentiful supply and at reasonable prices. I don't suppose this kind of luck can hold out indefinitely, but as I write, election day is barely one year away.
5. America ahead of the pack. Usually when America makes a strong recovery, that helps to activate a perceptible expansion for our trading partners. And the informed eye can indeed find some signs that the worst of the world's 1982 slump is behind us.
This time, however, Germany, France, and the Low Countries have hardly joined in with the progress of the US locomotive. Japan is at long last making an autonomous effort to pump up her own domestic economy.
Nothing is guaranteed in an inexact subject such as economics. Still, I think the odds are good that 1984 will see some further recovery abroad and a continuation of the rise in North America.
Does this mean that the economic house of the US is in order and that distortions in the international economy are under tolerable control?
No, of course not. Brazil, or Argentina, or several developing nations could still default on their international bank loans. The bond markets would not take such crises lightly and they would take stock prices down with them. The government agencies that insure the safety of US bank deposits would have to go into emergency sessions to prevent any rerun of the Great Depression.
The art of political economy is to be aware of all such contingencies, but also to keep them in perspective. One or a few sovereignty defaults, bad as they would be, do not constitute a lethal shock to the world recovery.
Early in most recoveries there is a honeymoon interlude. 1983-4 is no exception. Economic performance, like marriage and life itself, is a long-run matter.
Now is the time to be making plans. The US is currently an undertaxing nation. What our electorate continues to spend on defense and peace should not be financed by a structural deficit.
A citizenry low on private thrift ought not to compound its problem by fiscal thriftlessness. An affluent nation ought not to tempt to its shores the fruits of thrift on the part of poorer peoples all over the globe. Their work forces require at home the investment goods their own savings could finance.
There is some merit in the complaint that when America pursues a fiscal policy that raises her real rate of interest, this makes it hard for nations abroad to pursue the low-interest policies needed for their own domestic recovery programs.
The future is longer than the present and deserves some forethought, even while the honeymoon is still aglowing.