Clinton might well contemplate that at his economic summit on Dec. 14 and 15. He needs a candid appraisal of the economy, but he probably won’t get it from the summit. What looms is a gabfest of dozens of economists and business and union leaders.
Anyone who wants something from Clinton (more spending, new tax breaks) will fit economic analysis to political goals. The meeting is supposed to help Clinton decide what kind of “economic stimulus” package to propose, if any, This will be hard. If participants hold diverse views, no consensus will be possible. If they don’t, the meeting will merely reinforce Clinton’s biases. The candor Clinton needs doesn’t require a meeting. His advisers can easily paint a clear picture of the economy. They should tell him four things:
You lucked out. Since the election, economic reports (mostly covering October activity) have been favorable. Weekly unemployment claims have dropped. New orders for durable goods (everything from cars to jets) jumped 3.9 percent in October. Sales of existing homes (at a 3.6 million annual rate) were the highest since 1988. The economy’s third-quarter growth was revised up from an annual rate of 2.7 percent to 3.9 percent. Naturally, consumer confidence is also rising.
Consumers have paid down debts and have more spending power. Lower interest rates have increased home building. Banks are more profitable and have fewer bad loans. Although no one anticipates a boom, most economists see higher growth. The Blue Chip Economic Indicators (a monthly newsletter that averages the forecasts of 51 economists) predicts 2.6 percent growth next year, up from 1.8 percent in 1992. And that estimate preceded the latest good statistics.
Europe and Japan are in the dumps, and their prospects could worsen. Japan suffers from the aftershock of real-estate speculation and a business-investment boom. Europe is being strangled by Germany’s high interest rates. These have spread to other countries via a rigid exchange-rate system that is now breaking down. In 1993 the European Community’s economy will grow only 0.9 percent, down from 1.1 percent in 1992, says the Deutsche Bank. Japan’s growth is estimated at 2.7 percent, up from 2 percent. That may be too optimistic. It depends on a big government-spending package that has yet to be adopted.
The danger is that Europe’s and Japan’s slumps will deepen and hurt the rest of the world. Already our exports have suffered. In 1991 Europe accounted for 28 percent of our sales abroad and Japan for 11 percent. You might send your treasury secretary abroad to urge foreign governments to take steps to increase economic growth.
This, too, is a plus. The process has been painful, involving layoffs and bankruptcies. But surviving companies have become more efficient, creating the foundation for sustained growth and higher living standards. Only profitable and productive companies can afford higher wages. In 1992 productivity (output per hour worked) has increased at a rate of about 2.6 percent. Corporate profits have risen 10 percent in 1992.
No, inflation won’t soon soar. It’s about 3 percent, down from 6 percent in 1990. But a politician’s inflation problem is the willingness to ignore it. This abets a tolerance for low-interest-rate policies that, with time, raise inflation. It’s mainly a Democratic affliction. When Dwight Eisenhower left office, inflation was 1 percent. When Lyndon Johnson departed in 1969 it was about 6 percent. Inflation was dropping when Jimmy Carter replaced Gerald Ford; by 1980 it was 12.5 percent. “Conventional stereotypes” that Democrats raise inflation-are true, says the consulting firm DRI. You should shatter the stereotype.
So much for the facts. In the end, Clinton must still decide what to do. One argument for a stimulus package is that, without it, modest economic growth (2.5 percent or less) won’t much reduce the unemployment rate. A stimulus package would also provide an insurance policy, says economist Lyle Gramley, a former Federal Reserve governor. “We’ve twice before been in a period when we thought the economy was recovering, and it didn’t,” he says. If that happened it could devastate public confidence. Gramley prefers a tax credit to spur business investment, coupled with concrete commitments-tax increases or spending cuts-to reduce future budget deficits.
Too cute, say economists like John Makin of the American Enterprise Institute in Washington. Investors are acutely sensitive to inconsistent promises. Higher interest rates could undermine any stimulus plan. The Organization for Economic Cooperation and Development in Paris says a stimulus plan would end “all pretense of controlling” budget deficits.
Whatever he does, Clinton needs to keep perspective. He starts from a strong economic base. What matters is how the economy looks in a few years, not next spring. Trying to do too much too soon could backfire. Carter was so itchy to create jobs that he torpedoed the economy with high inflation. That wasn’t good economics-or, in the end, good polities.
