WORLD

PAIN OR GAIN?

Washington’s economic policies point to low growth and austerity

July 10 1995
WORLD

PAIN OR GAIN?

Washington’s economic policies point to low growth and austerity

July 10 1995

PAIN OR GAIN?

WORLD

Washington’s economic policies point to low growth and austerity

The extremes of free enterprise flourish in sight of the central Washington buildings where America’s economic managers operate—the White House, the Capitol and the Federal Reserve Board, the U.S. national bank commonly known as “the Fed.” By day, well-heeled pedestrians and joggers in designer togs encounter beggars extending paper cups and appealing for coins. After dark, within the view of passing free spenders in evening garb, citizens without a home or hostel space find a cheap bed in colonnaded doorways. Last week, signs of renewed recession menaced the fortunes of the prosperous, panhandlers and millions of people between the extremes. And even if the Fed decides this week to trim interest rates, reducing the cost of borrowing in an effort to promote growth, any relief is likely to be marginal, grudging and slow to take effect.

Whether or not recession grips the American economy, the prevailing policies in the White House and in Congress, as well as at the Fed, point to years of austerity, including a continuing scarcity of jobs, across the United States. The same prospect confronts Canada and other countries where elected and appointed officials share the U.S. priorities. The common aim is to reduce their national budget deficits and suppress inflation. That spells the danger of insufficient growth to provide jobs for an expanding workforce as well as for millions now unemployed.

There is uncertainty among the money managers over the current slowdown’s severity and what, if anything, to do about it. They foresee a danger that pending federal budget cuts will exert a further drag on the economy, although the scale and timing of the pruning remain to be settled. “It is difficult at this point to judge with any confidence how these various forces will work themselves out,” said Fed Chairman Alan Greenspan in advance of the reserve board’s meeting.

Regardless, the dominant commitment at the Fed, in the White House and among most members of Congress, is to tune down the national financial machinery. Those slowdown policies leave the impact on the people outside their windows largely out of the

equation. Greenspan, stating that the economy is barely growing, perhaps shrinking, sees “some increased risk of a modest nearterm recession.” But on the plus side for the board’s overriding campaign to hold down prices and wages, the slowdown also shows that “underlying inflation pressures are easing,” he said. Among many policy considerations, the Fed chief adds, “the most important is the necessity of maintaining stability in the prices of goods and services and confidence in domestic financial markets.”

Greenspan’s Canadian counterpart, Bank of Canada governor Gordon Thiessen, echoes that assertion. Furthermore, in Thiessen’s view, the U.S. downturn is “the best thing that can happen for Canada.” It means, he added on June 20—the same day that Greenspan delivered his assessment— that the risk of inflation has been reduced. And that, in turn, will eventually allow “a more sustainable and ongoing expansion in the U.S. economy.”

Many economists agree that maintaining high interest rates in the quest for wage and price stability deepened the recession of the early 1990s, postponed a full recovery and prolonged the slump in Canada. That is because the tight-money policy discouraged borrowing to expand business and production, hire help, buy homes and make other

REPORT FROM WASHINGTON

BY CARL MOLLINS

purchases on credit. A similar money squeeze—seven increases in the influential Fed interest rate from early in 1994 to last February—helped bring about the current slackening, some Fed members suggest. “The process of slowing to a sustainable pace has not been entirely smooth,” concedes Greenspan. “Uncertainties abound.” One uncertainty is the outcome of a political struggle over details of federal spending in a Congressional crusade to eventually erase the annual budget deficit. Reductions in federal outlays that begin to bite later this year—even the prospect of budget cuts—threaten to further depress the national economy.

Last week, after 23 days of dickering, the House of Representatives passed a compromise deal with the White House to shrink the existing federal budget. That measure, which stalled in the Senate at week’s end, trims only about one cent per dollar of current spending. At the same time, again after protracted bargaining, the Republican majorities in the Senate and the House celebrated their agreement on a framework program aimed at balancing the annual budget in the year 2002. “We’re saving America,” proclaimed House Budget Committee Chairman John Kasich of Ohio. “We are about to guarantee a prosperous America and a better planet.”

In fact, the program’s broadly outlined “savings” consist largely of slowing the future growth of social welfare outlays. It relies on assumptions that both inflation and interest rates will decline and—although it includes income tax cuts—that revenue will grow at a greater rate than rising annual spending. As well, the sticky details of the seven-year program remain to be filled in, starting with the federal financial year that begins on Oct. 1. The haggling is expected to stretch well into autumn.

Greenspan applauds the political efforts to “put in place a sensible budget policy,” even though the federal cuts, imposed on a laggard economy, might force the Fed off its game plan to bring about an inflation-free recovery.

Greenspan has already cautioned that dropping U.S. interest rates could repel foreign investors, prompting them to divert money into more rewarding markets and driving down the value of the already sagging U.S. dollar on currency exchanges.

That grim possibility— equally dim for Canada, with its close business links to the United States— reinforced the opinion of some analysts that the Fed would adjust interest rates warily, if at all, this summer.

Indeed, some Fed members put a positive spin on advance indications that the econo-

my’s output in the April-to-June quarter may show shrinkage. (The common definition of recession is two successive quarters of contraction.) Greenspan called the downturn “a process of moderation.” ■ Board member Lawrence Lindsey described it as “an inventory correction” —a slowdown in production while businesses market stockpiled goods.

In truth, it is hard for the most astute economist to tell now whether the current downturn is a I temporary dip or the start I of a full recession. A new 8 study by the investment S policy arm of New York City-based PaineWebber Inc. tracks evidence that even so-called final figures on economic performance are often unreliable. Calculations of GDP growth in 1992 and the first half of 1993 later proved to have been too low. The most recent revisions

for the 12 months from mid1993 to mid-1994 now record weaker growth in that period • than what “final” accounts showed. Remarked Edwin Kerschner, chairman of the PaineWebber Investment Policy Committee: “Economic statistics are continually subject to revision, long after the data has any timely investment significance.”

Greenspan predicted, as one result of so much uncertainty, a free-wheeling debate when his economists and bankers assemble at the July meeting of the board’s Federal Open Market Committee—in private, as is usual in its eighta-year meetings. Differences exist among the committee’s voting members—the six Fed governors (there is one vacancy) and four of the presidents of the reserve system’s 12 regional banks. Analysts describe the committee majority as “inflation hawks” allied with Greenspan. The two newest and younger governors, Clinton appointees Alan Blinder, 49, of Philadelia and Susan Yellin, 48, of San Francisco are described as “employment doves.” They are concerned that the fixation on fighting inflation costs jobs. The Fed’s legislated mandate calls for more balance, requiring its promotion of “maximum employment” as well as stable prices.

“Of one thing I am certain,” Greenspan said in advance of the meeting. “Our Federal Open Market Committee meeting will be most engaging.” But he quickly suggested that he expects to get his way: “I am also confident that the consideration given to the stance of policy will be in the context of our longer-term goal of price stability.”

Whatever the consequences of their decision, the Fed governors are immune from penalty, if not second-guessing. Full terms of office last 14 years if they choose to serve that long. Greenspan, 69, was appointed to the board in 1987; his second four-year stint as chairman expires next March, but his present term as a governor stretches to the year 2006. If the economy is depressed in 1996, a federal election year, it is Clinton and the Republican majority of Congress who will face retribution at the polls. But the harshest punishment for a wrong call by the Fed, the White House or Congress, will fall on both the present winners and losers in a worrisome economy and on many more people who likewise stand to lose a business or lack a wage. □