Giving Growth A Chance

The U.S. is entering 1996 in remarkably good economic shape. Over the past three years, growth has averaged about 3%, measured by the Commerce Dept.'s new output index. Corporate earnings, on average, are on track to soar a mighty 41% this year, the unemployment rate is only 5.6%, inflation is close to nonexistent, and productivity is substantially higher than it was in the 1980s. Interest rates are low and falling, the stock market is hitting new highs almost daily, and businesses are going public at a record pace.

On the international front, the persistent trade deficit with Japan is finally shrinking, the U.S. is attracting foreign direct investment at a rate of $69 billion annually, and, according to the Geneva-based World Economic Forum, efficiency has increased to the point where the U.S. has been acclaimed the most competitive economy in the world for the second year in a row.

There are even glimmerings of good news on the wage front. Many Americans are still earning less, in real terms, than they were five years ago. But real wages have started to move up across a wide array of jobs, especially in the service sector, as rising productivity and profits create more room for wage increases. That's essential if the fruits of growth are to be distributed to the bulk of Americans.


The one thing that's missing, surprisingly, is optimism about the future. The conventional wisdom among economists and policymakers is that the U.S. economy can grow only 2% per year for the foreseeable future, as measured by the new statistics. But this is a self-defeating attitude: These rates of growth are capable of keeping the U.S. in place, nothing more. If this is all the U.S. economy can muster, it will not be possible to pay for the education of the next generation, the retirement of the baby boomers, or the investment in physical and human capital needed to stay ahead in the global economic race.

In fact, the evidence is accumulating that the U.S. economy can safely sustain higher rates of growth, perhaps as much as 3% annually. Just as the economic pundits, including Alan Greenspan in his role as head of the Council of Economic Advisers under Gerald Ford, missed the slowdown of the economy in the 1970s, so are they missing the return of economic vigor in the 1990s. The productivity increases of recent years are no flash in the pan. Instead, they are the result of long-term structural forces, such as technological advances, globalization, and corporate restructuring, that will continue to produce gains in the years ahead.

Can anything be done to encourage growth? Most of the ongoing changes are beyond the reach of government action. The key to prosperity is how fast American companies and individuals can create new jobs, products, and industries that use the new technology, or can compete effectively in global markets. Government is simply not capable of managing the flood of creativity that is energizing the economy today. One example: No policymaker in his or her right mind could have ever conceived of the explosion of commercial and intellectual activity on the Internet over the past year.

Still, there are some ways that government can provide a better environment for growth. For one, there's room for short-term interest rates, now at 5 3/4%, to come down. The Federal Reserve, led by Greenspan, has done a terrific job in managing monetary policy in recent years. The economy has achieved the fabled soft landing. But now, like a general fighting the last war, the Fed is still concerned with inflation when it should be worried about growth. Lower short-term interest rates, by themselves, cannot assure prosperity. But they can provide enough of a boost to keep the economy going during the inevitable slow periods.


It's also essential for Democrats and Republicans to halt their feuding and finish balancing the budget. That's the best way to raise national savings and reduce long-term interest rates. The U.S., with a federal budget deficit totaling about 2.3% of national output, is already way ahead of much of Europe in closing the gap between government revenues and spending, but it could do even better. Moreover, even classic Keynesian economic policy suggests that the federal government should run a deficit during recession and a surplus during the good years--and if these aren't good years, it's hard to know what would be.

Even as they balance the budget, Congress and the Clinton Administration should focus on encouraging savings by individuals as well. The personal savings rate is still only about 4%, far less than what long-term growth demands. The new budget plan from Congress would expand the eligibility for individual retirement plans, but more incentives for savings are needed. One possibility: Increase the limit on how much individuals can put into their tax-deferred 401(k) plans each year. Such legislation may cost money, but the benefits of higher savings are well worth it.

Finally, it's about time that the U.S. was freed of outmoded regulations on telecommunications and financial services. Telecommunications reform may or may not happen before the end of the year, while finance reform seems stalled for the time being on Capitol Hill. Both pieces of legislation present the unappealing sight of large corporations mud-wrestling over who will get how big a slice of the pie. That doesn't benefit either consumers or business customers: 1996 should be the year when Congress passes deregulation of both industries.

Going into an election year, it may be hard for politicians to resist hyperbolic attacks on the economic policies of the other party. But what they should do is focus on the important goal: how to keep America growing. That is the true route to success.

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