Let's get down to brass tacks: What's really ahead for the U.S. economy? Is there going to be a recession?
Right now a lot of predictions are being made, based on little more than nervous emotion or selective glances at the economy after past stock market declines. Pessimists see the present as 1929--prelude to the Depression--while optimists say it's more like 1962, when stocks sank in a squall but the growing economy sailed on.
But smart people don't depend on past patterns or wishful thinking. They look at present realities--the ones everybody knows about, like the $150-billion government budget deficit and the $170-billion trade deficit--and they draw conclusions from the facts.
Those conclusions are challenging but not depressing. Smart appraisers don't see recession ahead, but rather leaner times for the consumer--tougher terms on credit, interest rates relatively high, no gains in real wages (adjusted for inflation)--and much more investment in productive industry as the United States works to eliminate its budget and trade deficits.
One smart person is Paul A. Volcker. The esteemed former chairman of the Federal Reserve Board shared his thoughts a week ago with 60 representatives of business, labor, government and the universities at a conference of the American Assembly, a public policy organization attached to Columbia University.
His speech was not for publication, but it was based on publicly available figures, and did not engage in wishful thinking.
Another smart person is Felix Rohatyn, senior partner of Lazard Freres, the investment banking firm and the man who helped New York City through its fiscal crisis a decade ago. Rohatyn looks at the same figures and comes to broadly similar conclusions.
Those conclusions recognize that the time is at an end when the U.S. government can spend $150 billion more than it is taking in and borrow much of the difference from foreigners. They recognize that the continuing trade deficit is distorting the U.S. economy.
So we will have to finance the budget deficit from domestic savings and turn back the trade deficit by the productive power of U.S. industry.
But that is easier said than done. What is being talked about is a 15% buildup in U.S. manufacturing and a shift of 3.5% of the U.S. gross national product from consumption to production--a greater economic adjustment than any nation in history has made.
Everything Has a Price Tag
First of all, the surplus savings aren't there and neither is the productive capacity. U.S. manufacturers are approaching full use of their factories as they produce to meet rising export demand. Soon the chemical companies and electrical machinery makers will have to build new plants or enlarge existing ones.
That will be good for the economy, of course, creating jobs and increasing productive investment.
But all good things have a price. The money for that expansion will come out of the consumer side of the economy, meaning there will be fewer goods available in the U.S. market because of lower imports, and less of the wherewithal to buy them because of tighter consumer credit and thinner wage hikes.
Leaner times probably will mean a suspension in the usual election year pattern of politicians pumping money into the economy. Doing so in 1988 might further sink the dollar, or scare the bond market with fears of inflation.
Longer term, say Rohatyn and others, the new economic discipline means higher taxes. A phased-in gasoline tax--10 cents a gallon rising to 30 cents over three years--is getting influential support. And so are tougher measures for reducing deficits, such as cuts in veterans benefits and new taxes on Social Security.
Which is why Rohatyn, who may become Treasury Secretary if a Democrat gets the White House, says that whoever forms the next administration will have to include opposition party members in the cabinet. Why? Because a wartime coalition will be needed to lead the nation in sharing the pain.
So the past year to examine is neither 1962 nor 1929. It's 1942, when under pressure of war, the U.S. economy shifted massively to production.