Giving U.S. Growth A Chance
The U.S. is entering 1996 in remarkably good economic shape. Over the last 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 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, and the stock market is hitting new highs almost daily.
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 the Geneva-based World Economic Forum has called the U.S. the most competitive economy in the world for the second straight year. There are even glimmerings of good news for wages. 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.
The one thing that's missing, surprisingly, is optimism. The conventional wisdom among economists 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: 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 investments needed to stay ahead in the global economic race.
In fact, evidence is accumulating that the U.S. can safely sustain higher rates of growth, perhaps as much as 3% annually. Recent productivity increases are no flash in the pan; 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.
Government can help by providing a better environment for growth. For one thing, there's room for short-term interest rates, now at 53/4%, to come down. The Federal Reserve has done a terrific job in managing monetary policy in recent years. 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 help keep the economy going during the inevitable slow periods.
It's also essential for Democrats and Republicans to 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 budget gap, but it could do even better.
Finally, it's about time the U.S. was freed of outmoded regulations on telecom and financial services. Telecom reform may not happen before the end of the year and finance reform seems stalled in Congress. 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 deregulation passes in both industries.
In an election year, it may be hard for politicians to resist making hyperbolic attacks on the economic policies of the other party. But they should focus on the important goal: how to keep America growing. That is the true route to success.