`IT was the best of times. It was the worst of times.'' Charles Dickens began ``A Tale of Two Cities'' with these words, words so famous as to have become a clich'e. Clich'es serve a useful purpose. To describe the United States and the world economy in these closing months of the '80s decade, I am forced to paraphrase Dickens' words:
Now is the time of economic chaos. Stock prices gyrate. American budget and payments deficits remain chronically bad. Even the Japanese, after a decade of incredible capital gains in land and share prices, are beginning to have nightmares of a Tokyo crash; and planners for the Common Market are becoming worried that the long expansion of the 1980s may be petering out.
On the other hand, fears of communist Europe and of ultimate nuclear holocaust are rationally weakening in the era of Gorbachev. The stagflations of the '70s seem to have passed into the history books. The tools of central-bank monetary policies once again seem to be working in good accordance with the principles of mainstream economics. Not since 1965 has the world long-run outlook appeared to be so hopeful. To strike the balance between the views of pessimism and optimism, let me analyze why the scales appear to me to point away from any doomsday scenario.
America still continues in a position of essentially full employment. Since our labor force now grows only slowly and since we are increasingly an economy of services, where strong growths in productivity are hard to measure, it is a proper thing if we throttle down to a 2 percent growth rate for one or two years. Even if a recession were to arise in 1990 or 1991, forecasters with credentials do not expect it to be a serious recession - say like 1981-82, or 1973-75.
Japan and West Germany have been the locomotives pulling the Asian and European trains. Both of these economies are in comfortable shape: After years of trade surpluses, they have the reserves necessary to engineer a stimulus when and if needed.
Manpower and womanpower from East Germany will add to West Germany's ability to grow. Total spending ought to be buoyed up by the opportunity to provide plant and equipment for the new labor force.
What needs most emphasis is correcting the following fallacy: If President Bush and Congress do not introduce programs that will alleviate our budget and payments deficits, then the next 20 months must become economically worse. That is not true.
Neither recession nor inflation are entailed by persistence of these deficits. (The evil of them is not a burden on the shoulders of Europeans or Asians. Rather the legacy of Reaganomics is a long-run slowdown in American capital formation financed by US savers, and a resulting slowdown in the end-of-century growth rate in our citizens' well-being and real incomes.
But what if 1990 brings another worldwide stock market crash? Certainly that cannot be ruled out, now that share prices have risen so much while at the same time corporate profitability is beginning to erode in a slower-growing milieu. However, the health of a nation depends on the performance of its Main Street economy - not on gains for speculators in the securities casinos of New York, Chicago, London, Tokyo, Milan, Madrid, Zurich, Sydney, Hong Kong, and Singapore.
When I lecture at home and abroad, businessmen ask of me:
``Now that the Gold Standard and the Bretton Woods system are gone, the dollar and the yen and mark oscillate out of control. How can the real economy be stable if the foreign exchanges float wildly up or down? Instead of concentrating on costs and production, today's businessmen must preoccupy themselves with international finance and currency hedging. Even governmental interventions by the Group of Seven seem incapable of taming the anarchy of floating exchange rates.''
My answer is carefully worded:
``I do not know, nobody knows, whether the dollar a year from now will have depreciated relative to the yen and the mark. Or will have appreciated.
``The issue is not a critical one. Even the French no longer believe that exchange rates pegged to goldare the best of all possible worlds. How eager Japanese and German investors are to recycle world surpluses into dollar investments will be the major determinant of next year's dance of the dollar.
``Fortunately Chairman Alan Greenspan of the Federal Reserve is not running our monetary policy with the major goal of freezing the dollar near to its recent parities. In a measure, the same can be said of the Bank of Japan and the West German Bundesbank.''
The time to worry desperately is when the ills that afflict the global and regional economies are such that governments are powerless to cure or even alleviate them.
Maybe Argentina is right now in such a state; or Israel; or the reactionary Chinese regime on the mainland. Back in 1979, when stagflation worsened for President Jimmy Carter, there was really no way to avoid both inflation and recession.
The present scene is a different one. Economic science is not so exact as to tell us in advance whether our next troubles will be recession or accelerating inflation. Fortunately the evidence of the last half dozen years justifies the reasoned hope that the macroeconomic authorities here and abroad do have the leverage and the elbowroom to prescribe policies that can lighten the burden of the evils tomorrow may have in store for us.