A Nation On Edgeby
It's the Panic of '91. No, not the sort of financial scare that sent stockbrokers diving out of windows, produced runs on banks, and heralded the Great Depression. Things aren't nearly that bad today. But a few months into a sputtering recovery, the economy is wracked by a paralyzing fear that keeps consumers at home -- and sends Washington policymakers into a frenzy.
The recovery can't seem to get started. The recession hit bottom in the spring, just when the pundits said it would. But instead of bouncing back smartly, the economy acts as if someone let the air out of it. "A foul mood is prevailing around the nation," says former Federal Reserve Governor Lyle E. Gramley. "The momentum of the spring has largely vanished." And instead of helping, Washington is adding to the national anxiety attack.
The economy is creating about 47,000 new jobs a month. That's adequate to keep the unemployment rate just below 7% but not nearly enough to restore consumer confidence. Instead, news of more and more layoffs and rising state and local taxes have dulled Americans' spending instincts.
Corporate earnings are improving, but they're still rotten, leaving executives gloomy and financial markets on edge. Retailers are looking forward to the holiday season with all the Christmas spirit of Ebenezer Scrooge. Manufacturers aren't feeling much better. Says David H. Hoag, chief executive of LTV Corp.: "People are just afraid to fork over the dough. They've convinced themselves that the economy isn't any good."
FATEFUL DECISION. Ironically, the economy is being hobbled because consumers and businesses are finally heeding advice that they work down the mountain of debt they acquired in the go-go 1980s. Companies knocked about $6 billion off of their interest payments in the first half of this year. And households have cut consumer debt by about 10% in the past year. In the long run, this reliquification will help enormously. But in the short term, it suppresses both consumer demand and business spending.
All this helps explain why the most nervous man in this jittery nation is the occupant of 1600 Pennsylvania Ave. Faced with a rising clamor for some policy action to kick the economy into a higher gear, George Bush has made a fateful decision to sit tight until next year. If Administration economists are right, growth will accelerate in the next couple of months and the outlook will be much brighter come spring. But if they turn out to be over-optimistic, the economy will be in serious trouble. And Bush will face a struggle for political survival, not the walkover reelection campaign he expected.
Trouble is, Bush's actions so far may have needlessly complicated prospects for both his campaign and for the economy. Once he recognized the recovery was going nowhere, the President reacted quite uncharacteristically. He got rattled and, in back-to-back blunders, sent shock waves through the financial markets. First, he sent bonds tumbling by fueling talk of a quick-fix tax cut. No sooner had investors calmed down than Bush threw a scare into the stock market by hectoring banks to cut their credit-card rates. Far worse, Senator Alfonse M. D'Amato (R-N. Y.) took Bush at his word and pushed a bill capping credit-card rates through the Senate.Perhaps worst of all, Bush vacillated. One day, he'd sympathize with victims of the recession and announce that "all is not well" with the economy. On others, he'd cite statistics showing that the recovery is on track. "I'm just going to stay the course and try to get programs enacted that have been stymied by the Congress," Bush said on Nov. 18. "It's not like we're dealing with a totally bad economy."
STALLING. Main Street is not buying it. "We have suppliers, competitors, and friends in business who haven't felt good about the world for a full year," says Bernard Marcus, chairman of Atlanta's Home Depot Inc. "But the President says there is no problem. Who's he kidding?" Adds University of Massachusetts professor Ralph Whitehead: "His approach to the economy is an exact replica of the Democratic approach to the Persian Gulf: 'Let's give it time, and it will all work out.' "
Time is just what Bush wants. He won't begin talking about a recovery strategy until Congress leaves town. And what finally appears in his January State of the Union address will have a familiar ring: Cut capital-gains taxes, expand individual retirement accounts, provide some tax relief for the middle class, and offer a few incentives for business investment. The only new twist may be a modest health-insurance plan.
Supply siders are livid at Bush's refusal to push broad new tax cuts to get the economy moving now. But most mainstream economists agree that standing pat is the best course, no matter how fainthearted it may appear. They fear that a big antirecession program would spook credit markets, driving up rates. "Doing nothing is probably the best thing," says Laurence Meyer & Associates economist Joel Prakken.
Many executives fear that a quick fix is worse than useless. "I already see the next recession in the making," says Reynolds Metals Chairman William O. Bourke. "The pump will be primed too much. A boom will be followed by a bust faster than the up-and-down of a toilet seat at a gas station."
Economists and many executives would prefer to see Bush focus on long-term economic problems, such as education, health care, infrastructure, and lowering the cost of capital. "All these are sound investments," says BayBanks Chairman William M. Crozier Jr. "If the Administration had a program for the future, financing it wouldn't be a problem."
That's easy for him to say. But the political system faces severe difficulty in finding new money for even the worthiest of programs. In past business cycles, Washington has used tax cuts and increased spending to pump money into the economy and speed recovery. But in earlier recessions, the deficit was small until the economy tanked. This time around, the red ink was running at 3% of gross national product before the slump began (chart, page 29). That sharply limited government's ability to use fiscal policy to juice up the economy. Even worse, so much of federal spending -- more than $100 billion this year for bailing out financial institutions and nearly $200 billion for interest on the debt -- does little to stimulate the economy.
TRAPS. So Bush is in a box. Bond traders, ever fearful of inflation, won't stand for anything that widens the deficit. Bush refuses to raise tax rates. Congress won't cut spending. The benefits from defense cuts are years away. And in any case, notes Prakken, "there is no such thing as a deficit-neutral countercyclical fiscal policy." That's not the only trap. Consumer spending may be the ticket to a strong recovery. But most economists say the long-term health of the economy depends on savings and investment, not consumption (pages 34-35). For a decade, politicians have decried low savings rates. Now, they want consumers to spend. Bush has practically begged them to hit the malls and get "cash registers ringing at Christmastime." But the pols can't have it both ways. "If you want to reduce debt," says American Enterprise Institute economist John Makin, "spending has to drop radically relative to income. You get a very precipitous drop in demand."
Even bashing banks over high interest rates is a two-edged sword. Bush knows that it's critical for the financial institutions to get money into the economy. But he fears that driving down rates will only wreck scores of already fragile banks. Bush must feel a bit like one of Nintendo's Super Mario Brothers: Everywhere he turns, there's another obstacle. "What's desirable in the short run is undesirable in the long run," says Urban Institute economist Rudolph G. Penner.
Mindful of the bind he's in, Bush has been urging Federal Reserve Chairman Alan Greenspan to open the money taps, and the Fed has responded with several cuts in short-term rates (charts). But long-term rates have remained high, and Greenspan fears that if the Fed loosens too much, markets may actually drive rates up.
HANDS OFF. That's why Bush has little choice but to hunker down and wait for the numbers to improve. And in the meantime, Democrats are gleefully comparing him to Herbert Hoover. Right-wingers are threatening a challenge in GOP primaries. A new BUSINESS WEEK/Harris Poll shows that people are eager for a policy that creates new jobs, although they aren't enthralled with any of the politicians' ideas. Even the backers of a go-slow course see risks. "The substance overwhelmingly favors the do-nothing course," says Penner, "but it's really terrible politics."
Bush's political foes aren't the only ones questioning the hands-off approach. Many corporate executives will keep demanding that Bush act boldly next year. Arthur Carr, CEO of Bytex Corp., a communications-equipment manufacturer in hard-hit Massachusetts, favors a quick payroll-tax cut and an emergency jobs program: "I don't think we've had a recession where there has been so little money available."
In a few weeks, Bush will launch a public-relations campaign. He'll talk up the economy, blast obstructionist Hill Democrats, and promote the long-term growth package he promises for January. But in his heart, Bush's fondest hope is that the economy will get moving on its own, snuffing out pressure for expensive new domestic programs and silencing his political opposition. Almost to a person, blue-chip economists think George Bush will win his gamble. But economic sages have misjudged this economy before. If they're wrong again, not just the man at 1600 Pennsylvania Ave. but all Americans could pay a fearsome price.