Despite worries along the way, the U.S. economy finished 1984 with a stellar performance. Real growth picked up in the fourth quarter, and wound up at 6.8%, the best year since 1951. Consumer prices rose 4%, slightly up from 3.8% in 1983, but declining at year-end. We must be doing something right. The main lesson, from our own vantage point, is that the time has arrived for a truce between supply-siders and the Federal Reserve. The supply-siders have felt that their incentive tax cuts rekindled the economy when they finally went into effect. But most of them, with the notable exception of Arthur Laffer, worried that the Fed would choke off the recovery out of fear that real growth was too speedy, even though collapsing commodity prices forecast further progress against inflation.
For its part, the Fed fretted about the deficit, as central bankers always do, and held out tax increases as a ``last resort.'' Worse, its spokesmen sometimes did talk as if they really believed that Moses came down from the mountain with a stone tablet saying that any growth beyond 3% was sinful and inflationary.
Judging by the final results for 1984, both were right and both were wrong. Clearly the Fed did not choke off recovery, backing away from its tightening late in the year. Just as clearly, the economy managed growth well above 3% without reigniting inflation. Trying to hold the surging economy to some such artificial figure surely would have been a disaster.
In a larger sense . . . the main credit for the economy's 1984 performance should go to the economy itself, which clearly has a vitality of its own that does not depend on the fine points of macroeconomics. Poor economic policies can certainly sap this vitality; the economy did need relief from inflationary monetary policies and oppressive tax rates. But once these policies are pointed broadly in the right direction, the creative energies of millions of American businessmen and consumers have a power of their own to ride over minor economic disputes or mistakes.
This observation is not an argument against further improvements in macroeconomic policies; we are starting to learn what works and should apply more of the same. But it is an argument for confidence in the future. The system is working, and success feeds on itself.