There is an air of almost blind optimism about the outlook for the U.S. economy that is puzzling. To be sure, things have not looked better for some time, but looking better and being better are two different things.
Because things are looking so good now, concern about severe internal and external imbalances is low. "If it ain't broke, don't fix it" seems to be the feeling.
We talk excitedly about the sheer mass of the federal budget deficit, but odds are that we will do nothing about it this year. Why? Because there does not appear to be any good reason to do anything about it. All the scare stories about the horrendous consequences of a burgeoning budget deficit have come to naught--thus far. So, why worry?
We wring our hands over what is thought to be a grossly overvalued U.S. dollar and write yards of material about its consequences. Yet, nothing happens as the dollar chugs ever upward except that the rate of inflation gets lower and lower and the foreign capital keeps pouring in. Who wouldn't like to have those kinds of problems?
There is no doubt that, in many respects, the U.S. economy has more positive things going for it than most would have guessed four or five years ago. And yet, I can't help feeling that, in some respects, we are living in a kind of excessively optimistic situation that simply can't go on much longer.
For instance, does it make sense that the United States--the richest country in the world--should be financing its internal budget deficit by sucking huge amounts of savings out of other countries--in most cases, from those that need to keep the capital?
Does it make sense that the United States, a country that a few years ago was seen as a political and economic bumbler, is now considered the political and financial equivalent of the Holy Grail despite its net debtor position with the rest of the world?
Does it make sense that the dollar should have increased by 60% to 70% against the currencies of its major trading partners in the past four years, even if we did install Federal Reserve Board Chairman Paul A. Volcker at one end of Washington and Ronald Reagan at the other?
Does it make sense that, despite an extraordinary recovery in U.S. business investment in new productivity-enhancing machines and equipment, very little of the improvement seems to be flowing through to domestic manufacturers of capital equipment, especially not to, of all people, the makers of high-tech products, America's specialty?
Does it make sense that, in spite of all the money being spent on improving productivity, the actual figures that measure the success of that productivity in this recovery are still substantially below the norm?
Does it make sense that, three years into an economic recovery, the federal budget deficit is rising, not falling, and that, relative to gross national product, it is not far from where we left it at the peak of the last recession?
Does it make sense that, regardless of how much the Reagan Administration or the Congress insist they have done to restrict spending, the growth path of total outlays (including, importantly, defense) varies not a whit from a pattern that has been in train for at least 20 years?
Despite heroic achievements in slowing the non-defense components of the federal budget, what was saved elsewhere was spent on defense; indeed, if we look at total outlays, it is difficult to tell the difference between this Administration's policies and those of any other in the past 20 years, regardless of party. We have done absolutely nothing to alter a basically rising trend of outlays within the context of the overall economy.
Where this Administration has made a difference is on the revenue side of the federal budget. There, we have definitely lowered the government's take relative to where it has been headed for years and crimped it permanently by indexing the income tax brackets starting this year. No longer can the government benefit by its own inflationary mistakes--which would be fine if only we had done the same thing on the spending side. Since we didn't, we are now faced with a chronic budget deficit of at least 5% of GNP to and beyond 1990, and even that assumes no recession in the near-term future. A recession, of course, would push it much higher. Even 5% of a 1990 GNP is nearly $300 billion, on which the interest bill is not peanuts.