Expanding the 'credit line' for good economic times

Major parties pat themselves on the back, but economists place much credit elsewhere.

Republicans claimed credit for the nation's prosperity at their nominating convention.

Democrats did the same last week.

Generally voters take such political crowing with a grain of salt.

Asked who "deserves the most credit for the economy?" Some Americans pat themselves on the back.

Pollster John Zogby, quizzing 1,004 people last month, found 26.3 percent credited the "hard work of the American people."

They are right.

Yet economic policy does have an impact on whether that hard work brings broad prosperity.

Of those polled by Mr. Zogby, 25.1 percent gave the most credit to the Clinton-Gore administration; 17.6 percent credited Federal Reserve Chairman Alan Greenspan; 8 percent the Internet revolution; 7.7 percent former President George Bush; and 6.7 percent the GOP majority in Congress.

Some 8.5 percent weren't sure whom or what to credit.

Praising Alan

Several economists, asked to assign credit for the 10-year-old economic expansion in as nonpartisan fashion as they could muster, agree that Mr. Greenspan and the Fed deserve great glory.

Good Fed policy is "the biggest part of the story," says David Wyss, chief economist of Standard & Poor's DRI, an economic consulting firm in Lexington, Mass. "The best thing President Clinton has done for the economy is to reappoint Alan Greenspan twice." (Greenspan, a Republican, was first given his job by President Reagan in 1987.)

Economists appreciate Greenspan's leadership of the Fed because it kept interest rates relatively low in the 1990-'91 recession and during the slow recovery that followed at first. Then the Fed avoided any major damage to the US economy by holding rates steady during the Asian financial crisis in 1997 and lowering them after Russia's devaluation of the ruble in 1998.

Once the crisis was past, the Fed started to raise interest rates to deter possible inflation.

But it didn't slam on the monetary brakes to satisfy those economists who believed 6 percent unemployment was necessary to prevent greater inflation. The Fed let unemployment sink to 4 percent without slowing the economy.

"Greenspan didn't panic," says Susan Hancock, chief economist of Prudential Economics, Newark, N.J. "He was willing to experiment."

Digging out from the '70s

Former Federal Reserve chief Paul Volcker gets praised by economists for stopping the double-digit inflation of the late 1970s - though with a severe recession.

"It takes a long, long time to fix the kind of problems the US was having in the 1970s," says Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson Inc., a Chicago brokerage house. "You can't fix it in three years."

President Ronald Reagan is also lauded for slashing the extremely high marginal tax rates of upper-income people - the percentage of their last dollars earned paid in taxes - during his first term. Such high rates impede hard work, many economists maintain.

The Tax Reform Act of 1986, passed with a bipartisan vote, is commended for eliminating a host of tax loopholes that cause business inefficiencies. This move "broadened the tax base" - made more income subject to taxation, though at a lower rate.

The switch of the federal budget from huge deficits to large surpluses also gets acclaim from economists.

"A minor part of the story," says Mr. Wyss. But others are more generous in estimating its contribution to prosperity.

The deficit first got seriously tackled with the Omnibus Budget Reconciliation Act of 1990. It introduced credible caps on discretionary spending and raised tax revenues. President Bush was in the White House and thereby violated his "Read my lips" campaign pledge of no tax increases.

Another factor in turning around the budget picture was the tax hike pushed through Congress by President Clinton in 1993. The measure took back a bit of the marginal-tax cuts of Reagan and raised gasoline taxes 4.3 cents a gallon.

But it didn't damage the recovery. And the following lower interest rates stimulated business investment.

Chris Varvares, an economist with Macroeconomic Advisers, a consulting firm in St. Louis. figures the White House's economic advisers at the time - Leon Panetta, Alan Blinder, and Alice Rivlin - should get some credit for persuading Clinton to tone down his spending plans and tackling the deficit.

Other elements economists credit for supporting the bustling economy include:

*New technologies, introduced or developed by Bill Gates of Microsoft, Steve Jobs of Apple, and other entrepreneurs brought into being the thriving "New Economy" with the Internet and cheaper telecommunications. Computerization of business also helped raise productivity.

*The crisis in the savings-and-loan industry was overcome.

*Globalization kept costs and inflation down. The North American Free Trade Agreement opened up and expanded business with Mexico and Canada.

*Many restrictions on the financial industry were removed.

Wyss also sees some benefit from the semi-stalemate arising from a Republican-controlled Congress and a Democratic president. Exaggerating somewhat, he says, "Washington didn't do anything. By in large, the best thing the politicians have done is keep their hands off the economy."

(c) Copyright 2000. The Christian Science Publishing Society

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