Washington Fiddles, The Economy Drifts
The U.S. economy is wobbly again. It shot out of 1992 only to lose momentum and falter in the first four months of 1993. The latest reading of the leading indicators shows a drop of 1% in March, the worst decline since November, 1990, when the country was in recession. The conventional explanation among economists is the Blizzard of '93. But there is no way for bad weather to explain what happened in April, when the National Association of Purchasing Management index dropped sharply to 49.7% from 53.4%, and corporate layoffs rose 3.6%. Despite stronger auto sales, the second quarter may not turn out to be much better than the first, which grew at a tepid 1.8% rate.
We believe Washington has a lot to do with this big chill. There is uncertainty in the economy because there is uncertainty on the Potomac. Business and consumers are confused by the trial balloons, leaks, and policy zigzags out of Washington almost daily. Most disturbing is the static over new taxes. The deficit-reduction package, once a sure thing, now looks shaky. The Republicans, fresh from their evisceration of the President's stimulus plan, are making noises about refusing to agree to any new taxes to cut the deficit.
It's no wonder that people and corporations are confused and are dialing back their spending and investments. Bush-era gridlock threatens just when the country desperately needs a sense of direction. If this continues, any kind of economic or political shock could send the economy into quadruple-dip.
The uncertainty in Washington must end quickly if the recovery is to regain its footing. Above all, the sparring between Democrats and Republicans over taxes and spending in the deficit program should be settled in weeks, not months. Bill Clinton should make it clear that he is willing to accept congressional changes in his plan that shift a significant sum from new tax hikes to new spending cuts. And if cuts are made, Republicans must agree to higher taxes--if not corporate taxes, then certainly consumption, such as energy.
The Administration must also face reality on the cost of health-care reform. A bare-bones plan that costs about $30 billion and is financed mostly through sin taxes can fly. Congress and the voting public aren't going to accept much more. Clarity and pragmatism are the order of the day.