There were no good answers. The Federal Reserve Board won plaudits, and at least a one-day lift in the stock market, by kicking off an unusually sharp round of interest-rate cuts; but many doubted that lower rates alone would lift the nation out of its doldrums. A parade of economists, headed by Fed chairman Alan Greenspan, marched up Capitol Hill to warn that “quick fixes” such as income-tax cuts would do more harm than good. Nonetheless, Congress was flooded with bills proposing everything from quickie tax cuts to protectionist trade curbs. In the White House, Bush’s aides squabbled inconclusively over measures ranging from business investment tax credits to a $300 rebate for every taxpayer.
As Bush’s people freely conceded, any action might be too little, too late; a remedy offered now might not pass Congress before next spring, when it might touch off another round of inflation or prove counterproductive, scaring the money markets and choking off a recovery. Economic wisdom stood conventional advice on its head: DON’T JUST DO SOMETHING; STAND THERE. But whatever the risks of acting, inaction seemed worse. Thanks largely to the slump, Bush’s approval rating in a Washington Post-ABC poll fell to 47 percent, his first dip below a majority. “Lousy economies just wreck presidents,” said economist Murray Weidenbaum of Washington University in St. Louis. “Look at Jimmy Carter.” Thus, good economics or not, Bush was bound to act. “No one knows what will be in the package,” said one aide. “I can only say with certainty that there will be a package.
GM’s bombshell was probably overdue. After years of dwindling market share and hemorrhaging balance sheets, the company was conceding that markets lost to the Japanese will never be regained, and trying to trim to fighting shape (page 16). But the move added to short-term public worries, leaving open which plants were targeted and which communities would suffer. “I’m kind of lost,” said assembly worker Don Gunsolus, standing in the rain outside a GM plant in Arlington, Texas. “We’ve put everything on hold.” And the shock seemed to crystallize the nation’s fears of long-term decline and fall. “There is a deep-seated concern out there,” Greenspan told the House Ways and Means Committee, “which, I must say to you, I have not seen in my lifetime.”
Some worriers were even invoking the Depression of the 1930s. Federal deposit insurance and sharper economic tools have produced an economy “entirely different” from that era, said chief economist Lyle Gramley of the Mortgage Bankers Association, but “nobody has seen collapsing real-estate values and collapsing banks like this since the Great Depression, So people are worried and scared. Perhaps without cause, but nonetheless, the worries are real.”
Is the economy really that sick? By most measures, certainly not. Although the apparent recovery last summer has clearly faltered and the recession is now the longest since World War II, it remains comparatively mild. Unemployment, at 6.8 percent of the labor force, is little more than half the peak rate in the 1982 recession, and most forecasters still expect a modest recovery next spring or summer. Still, there were major new factors on the downside, and good reasons why the usual remedies won’t work. Among them:
GM was among the last of the big manufacturers forced to trim down. Now service businesses are having to cut their payrolls to become competitive. Large numbers of white-collar workers are at risk, and those cut won’t be rehired later. Like rust-belt workers before them, they may find new jobs only at lower pay with fewer benefits. The nation’s long-term rise in living standards has gone flat in the past three years, and as Greenspan warned, many Americans now fear that they won’t live as well as their parents did. The huge baby-boom generation is especially vulnerable to such fears; many baby boomers are living through their first recession as working parents, with mortgages and children to worry about.
The low population growth of the “baby bust” years has also brought huge changes. During Bush’s presidency, economic growth has created roughly 500,000 jobs, a pittance compared with 4 million new jobs in the first three years under Ronald Reagan. But the reduced rise of the labor force has masked this sluggish growth. If there had been as many new workers as in the early ’80s, unemployment would now be around 10 percent. Paradoxically, the slow population growth also tends to retard recovery: there’s less demand for goods and services, and fewer workers available to provide them.
In rare consensus, most economists agree that the huge growth of the federal budget deficit, to a total debt of $3.6 trillion, rules out major increases in deficit spending to stimulate growth. As it is, the Congressional Budget Office calculates this fiscal year’s red ink at $362 billion, and interest payments alone will total $210 billion. The borrowing of the ’80s would not have been harmful if the money had been invested in productive facilities, but it wasn’t; as New York Sen. Daniel Patrick Moynihan puts it, in the Reagan years we borrowed $1 trillion from foreigners and used it to throw a party.
The giddy boom of the ’80s made major distortions in the economy. Speculative building has left thousands of vacant condos, warehouses, stores and offices. Businesses took on huge debts to perform tricky leveraged buyouts or avoid hostile takeovers. The decade’s consumer buying spree left its own hangover. People went so far into debt that payments on it, which normally average 6 percent of household budgets, have risen to 8 percent. Now consumers have decided to pay back more than they borrow-and if they were to get a tax cut, economists say, it would be used mostly to work off debt. That would be good for longterm growth, but it would damp down any quick economic bounce from lower taxes.
The S&L mess has compounded the troubles. Bailing out depositors in failed thrift institutions will cost $115 billion this year-money that will have almost no economic impact, since it merely replaces squandered funds. The rest of the federal deficit, $247 billion, is actually lower than the previous year’s, and thus less stimulative. Economist Allen Sinai of The Boston Co. argues that “Fiscal policy actually has been restrictive,” and the negative effect will get even worse: federal, state and local taxes rose by $33 billion in 1991 and will jump an additional $17 billion next year. Perhaps worst of all, the S&L scandals have brought a crackdown by bank examiners that makes banks jittery about new loans. For the first time in U.S. history, total private debt has actually shrunk in the second half of this year–and administration officials have been pleading with banks to ease up on their credit crunch.
No reputable experts see economic disaster in any of this. As in any recession, hardships ultimately will pay off: when the excesses are sweated out of the economy, normal growth can resume. But without government nudging, that isn’t likely before next year’s election, which puts George Bush’s own job at hazard. Already, the Democratic National Committee has issued a press release mocking the parallels between the president’s recent economic comments and Herbert Hoover’s optimism in 1930. And even as New York Gov. Mario Cuomo bowed out of the 1992 race (box), he sounded the same theme.
Bush himself has been watching with frustration as the recovery stumbled and his aides argued over what to do. He griped last month that he felt as if he were standing in a hurricane, hearing only noise–and last week it just got louder. A meeting in the office of the new chief of staff, Samuel Skinner, broke up in bickering; the $300 rebate proposal, which had been an early favorite, was laughed off as too reminiscent of Jimmy Carter’s stillborn $50 rebate to jump-start the economy in 1977. Most aides favored an investment credit for business, and that seemed likely to survive in the package. Others wanted an increase in personal exemptions or a tax break for first-time home buyers. Bush’s cherished cut in the capital-gains tax was on the table as always, but might not be passable in Congress. The only real decision was to repackage Bush’s upcoming trip to the Far East as a quest for jobs and exports, not a foreign-policy junket. “The president’s message will be jobs, jobs, jobs, every day he is out of the country,” said a senior adviser. “That way Bush keeps his job.”
But everyone knew that wouldn’t be enough to dispel the image of drift and inaction. A decision on what to propose would be put off as long as possible, probably until just before the Asian trip. But sooner or later a bill would take shape–and that would be just the beginning. Any move big enough to budge the economy would probably break last year’s budget agreement, with the president’s declaration of an “emergency” as justification. And that would open a Pandora’s box of bidding in Congress for middle-class votes. The resulting measure would pander to everyone, with a host of special-interest tax cuts thrown in, financed mainly by prayers for revenue. As Budget Committee chairman Leon Panetta said of his colleagues, “They’ll never let that train leave the station without their baggage on it.”
With a great deal of luck, the debate might last long enough for an upturn to start spontaneously, in which case George Bush could sail to re-election with a statesmanlike veto of the final Economic Recovery Act of 1992. But nobody should count on it. A better bet is that Bush will propose, Congress will dispose and the nation will be stuck with the result-no matter what it does to the economy in the long run. And if people suspect that their government doesn’t know what to do, they’re wrong. It’s worse than that: the politicians know exactly what they’re doing.
There is a deep-seated concern out there which, I must say to you, I have not seen in my lifetime.
–ALAN GREENSPAN
