US Economic Woes Will Take Years To Work Out
THE United States economy is marking time. It has been rocking along the bottom since April 1991. At the crucial point - just as we were sliding into recession - there was no help from policymakers in Washington. In late 1990, they gave us tax increases, spending cuts, regulatory expansion, and banking restrictions. As some of us warned at the time, the result would be a longer recession than was generally expected.
The upturn will be slow when it comes, hopefully by midyear. For 1992, I forecast about 2 percent real growth, 3 percent inflation, and 7 percent unemployment (nothing for the Guinness Book of World Records). It will take years to work out problem areas, such as the surplus of commercial real estate. Large defense cuts are on a five-year time frame (reductions of at least 25 percent from current budget levels), and environmental and other regulatory burdens are going higher.
Some showboating tax cuts may be made in this election year. Using what can be called a "cynical leading indicator," it is likely that any revenue changes enacted will take effect after the upturn is clearly in place. Cutting "middle class" taxes and paying for the revenue loss by "soaking the rich" is the most primitive political response to what worries the American people. Jobs are not created by cutting your taxes and raising the other fellow's.
The slowdown in the US economy will extend beyond the recession. The US is adjusting to a variety of challenges simultaneously, ranging from the end of the cold war to the deleveraging of business finance. The wonder is not that the economy is staggering under that load, but that it is doing as well as it is.
The upturn is behind schedule because the normal forces of recovery are being deflected by the process of retrenchment and adjustment. Declining interest rates and rising stock prices have led to new issuance of equities on a large scale.
However, much of the proceeds is going to strengthen balance sheets, rather than being invested in new plant and equipment. Likewise, lower mortgage rates have led consumers more frequently to refinancing existing mortgages than to purchasing new homes. Banks have sensibly used some of the lower cost of funds to increase their capital, rather than merely to cut costs to their customers.
This process ultimately will lead to a healthier economy. The US economy will be leaner and more competitive. But, like any investment, the costs come first and the benefits later.
Meanwhile, real estate and construction-related activities will respond weakly to normal monetary stimulus. Who needs another office building in downtown anywhere? The US now has 17 square feet of retail space per capita, compared to 7 square feet a decade ago. Defense scientists and engineers will be absorbed very slowly. Where they are needed most, in teaching, regulatory barriers are highest (in the form of certification requirements for high school science and math teachers).
New projects, new products, and new ventures are delayed because of regulatory uncertainties. Recall the lesson of Superfund: Just because something was perfectly legal when you did it is no excuse. Years later, a company may be fully liable to new standards and retroactive requirements.
US firms increasingly consider location of new activities on a global basis. This compounds the adverse domestic effects of the business downsizing and restructuring that is underway.
The runaway budget deficit (now hitting $400 billion) inhibits major policy changes. Perhaps we should be thankful. After all, 1992 may turn out to be the opposite of March in the old adage. It came in like a lamb, but it may go out, if not like a lion, then as economist John Maynard Keynes said, at least with some vigorous animal spirits.
A final thought: The patron saint of forecasting is Robert Burns, who warned about the best-laid plans of mice and men.