The dollar will continue to fall or it will stabilize at about its current relationship to the Japanese yen and West German mark. The stock market no doubt will fluctuate around either a declining or rising trend line, unless of course panicky market operators stage a reprise of October's Black Monday.
The jerry-built budget compromise will survive or perish in Congress. Highly tentative Japanese and West German steps toward the stimulation of domestic demand will either be pursued or revealed as no more than efforts to soothe Treasury Secretary James A. Baker III. The Federal Reserve's injection of new liquidity and rising import prices may or may not reignite inflation. Recession is either imminent or postponed until after next year's election.
To the solution of these puzzles, I am totally unable to offer guidance.
Oddly enough, the slightly more distant future contains more approximations of certainty than do the next two or three months. The profligacy of the Reagan years has endowed us with an enormous trade deficit--to the elimination of which dollar devaluation is no more likely to supply a permanent solution than earlier devaluations of the British pound, the Mexican peso, and numerous other currencies. History records many sequels of competitive devaluation, domestic inflation, or both.
The $200-billion improvement in our trading accounts needed to eliminate our international deficit arithmetically requires import limitation and export expansion. Other things being equal, Americans will be compelled to buy less and endure declining living standards. More of our gross national product will be claimed by foreigners, who already own a large fraction of our national debt and a growing portion of the manufacturing sector.
If one of the International Monetary Fund's teams of experts drops in on Washington early in the next Administration's tenure, its members will in all probability recommend the same austerity measures as cause riots in the Third World: cuts in government spending, higher taxes--and, implicitly, a recession to lower public expectations of wage and benefit improvement.
The Democrats' notorious non-candidates, Sen. Sam Nunn of Georgia, Sen. Bill Bradley of New Jersey and New York Gov. Mario Cuomo, the Sphinx of Albany, may wisely have concluded that the next President will be compelled to recommend such politically calamitous measures as curtailment of middle-class entitlements and higher taxes that he will be a single-term chief executive. Why not, prudence may be instructing the three reluctant Democratic dragons, let a Republican play Herbert Hoover--the better to prepare the Oval Office for an F.D.R.-style restoration in 1992?
There is indeed no quick fix for the American economy. Even during the long five-year bull market, two families were dropping out of the $20,000-to-$40,000 middle class for every one that moved upward. Since the mid-1970s, wages in real terms have been declining. The consumer feast has been financed by increased numbers of working women, less saving and ballooning consumer debt. Yet there is a way to alleviate the impact of trade adjustment and restore the prospect of renewed improvements in general living standards.
That is a genuine commitment to full employment, an objective toward which the 1978 Balanced Growth and Full Employment Act supposedly directed Congress and the President. The benefits of full employment apparently require enumeration since they so seldom are mentioned.
Employed men and women pay taxes and enlarge the GNP. Their jobless colleagues collect benefits and contribute heavily to the pathologies of alcohol and drug abuse, mistreatment of spouses and children, criminal conduct, mental illness and suicide. New prisons are far more expensive than new homes and child-care centers. The labor scarcities accompanying 3% to 4% unemployment rates would compel management to subsidize job training, improve working conditions, pay heed to worker morale and substitute state-of-the-art technology for expensive human labor.
Carrots and Sticks
Also, full employment diminishes welfare dependency. Massachusetts' success in converting welfare beneficiaries into private-sector employees is directly related to the state's 2% to 3% unemployment rate. Job training and retraining schemes work when enrollees see real jobs at decent pay after graduation. If managerial energies shift from financial strategies to ancient concerns for quality and productivity, so much the better for the American future.
Full employment has a downside, the danger of renewed inflation. Two responses are appropriate: Protracted unemployment is worse than moderate inflation. And, against inflation rates higher than moderate, it is time to consider a relatively old idea--sponsored by both liberal and conservative economists. That is a tax-based income policy.