The boom in gloom is not exclusively–or even mainly–the creation of congressional Democrats trying to embarrass the White House on the eve of an election year. A few weeks ago, The Wall Street Journal interviewed a sample of corporate chief executive officers. This is what Bernard Marcus, the head of Home Depot Inc., a chain of hardware and home-repair stores, had to say: “You’ve heard the thing about Nero fiddling while Rome burned. Well, President Bush is fiddling while he’s going to vacate the White House … If I were president, I would hold Congress in session, and I’d say, “I’m not letting anyone go until we find something that creates jobs’.”
But for panic, it’s hard to beat House Republicans, who have been describing the situation as desperate and deteriorating. They want Congress to enact a rescue package of tax cuts immediately and urge President Bush to install Housing and Urban Development Secretary Jack Kempwho’s also been painting the economy in bleak terms-as a domestic czar.
There are at least three things wrong with this clamor of extreme pessimism:
It vastly exaggerates the gravity of the economy’s current weakness. The civilian unemployment rate (6.8 percent in October) was still lower than it had been in the first seven years of the 1980s (every year from 1980 to 1986) and for three years during the 1970s (1975, 1976 and 1977). Although most economists have grown more pessimistic since late summer, the majority still expect a slow recovery in sales and production. The latest survey of the National Association of Business Economists predicts 3 percent growth in gross national product in 1992. Unemployment would decline slightly.
The message that the White House and Congress could boost the economy’s growth easily is misleading and possibly dangerous. At best, an ambitious recovery plan-tax cuts and spending increases-wouldn’t work instantly. Spending programs don’t immediately gush dollars; projects have to be approved, contracts awarded. Investment incentives don’t automatically generate new investment. At worst an ill-conceived program–a smorgasbord of tax breaks and pork-barrel projects–would backfire. It would frighten financial markets about inflation and raise long-term interest rates, which would depress housing construction, business investment and the stock market.
The focus on short-term problems ignores the government’s long-term budget dilemma. What’s conveniently forgotten in all the talk of tax cuts is that, even under fairly optimistic economic assumptions, federal budget deficits will persist indefinitely into the future. The latest forecast of the Congressional Budget Office projects deficits between 2 and 3 percent of GNP for the last half of the 1990s, down from 5 percent in fiscal 1991. Americans still need to reconcile their appetite for government services with their reluctance to be taxed.
Could it be that the boom in gloom will be vindicated by events? Anything’s possible. The grimmest view is that the hangover from the heavy borrowing of the 1980s–by consumers, businesses and especially real-estate developers–heralds a prolonged economic collapse. Bad loans have weakened banks and other creditors; in turn, their inability to lend deepens the slump. This is the theme, for example, of “The Great Reckoning,” a book by William Rees-Mogg, former editor of The Times of London, and James Davidson, head of the National Taxpayers Union.
But the odds of a 1930s-type calamity are extremely long. There’s a huge difference between today’s slow growth and the steep declines then. From 1929 to 1933, U.S. GNP dropped 30 percent. The problem was that the Federal Reserve–caught between protecting the gold standard and promoting recovery–was too restrictive. Even current critics of the Fed-who argue it should ease credit more–don’t expect a comparable blunder.
No one can guarantee that the economy won’t slip back into recession: that is, total production could start to drop. The recovery has been slow, because excess commercial construction and heavy consumer borrowing in the 1980s have depressed new spending. At the same time, industries that overexpanded (not just commercial construction, but also retailing, hotels, banking and computers, to name just a few) are retrenching. Last week, IBM said it would trim its work force by an additional 20,000. Naturally, such cutbacks raise fears about unemployment, subvert confidence and weaken spending. Consumer spending has been essentially flat since July.
The obsession with bad news, though, obscures almost any good news. In October, new housing starts were 29 percent above their low point in January and 6 percent higher than in June; new permits (a sign of future construction) were up 5 percent from September. Exports remain strong. New orders for durable goods-machinery, appliances, furniture-rose in October and were 10 percent above their low point in March.
The reality of today’s economy is a lot duller than stories of impending catastrophe. It takes time for debts to be paid down and for overbuilt industries to shrink. “The economy is going sideways,” says forecaster David Wyss of DRI/McGraw-Hill. It’s not getting better-or worse-quickly. The clamor to “do something” is a denial of reality: it reflects a romantic belief in the prowess of government to make any hurt go away. The presumption is that everything that has gone wrong is the government’s fault and, therefore, the government can fix it. What’s ignored is the critical influence of consumer and business behavior on the economy.
The quest for instant cures is illusory and, possibly, selfdestructive. If it spawns silly government programs-or so much pessimism that the economy really does suffer-then we’ll be the victims of our own careless rhetoric.
