Neither Yeltsin nor Clinton will stop the party
October 26, 1998
by Irwin Stelzer
TOMORROW is Labour Day, a holiday that trade unions and the politicians they support once celebrated with near-religious fervour. But, with the decline in union membership, this holiday has gone the way of others, including Christmas: it has become secularised. Labour Day now means that beach houses are to be closed, the last gin and tonic quaffed, and the rat race begun anew.
Americans return to normal schedules $2 trillion poorer than when the holiday season began. Yet they remain calm. Karlyn Bowman, Washington's premier poll analyst, says there is nothing to indicate panic, at least not yet, even as people contemplate shrunken retirement accounts and bears prowling Wall Street. A Gallup poll after the market began to fall shows that 65% of Americans rate economic conditions as excellent or good, unchanged from the pre-summer figure in record territory.
So Americans know a good economy when they see one. But they also know the future may not prove as cheerful and wallet-filling as the recent past: 45% think the economy is getting better, 41% expect it to get worse, and 11% anticipate no change in conditions. This is a less optimistic view than in March. At that time 69% saw conditions improving and only 21% thought they were deteriorating, with 8% expecting no change.
This decreased optimism is due in part to a sensible realisation that the profits growth that fuelled Wall Street's boom may slow as the economy cools, and as margins are squeezed between rising labour costs and downward price pressures created by cheap imports from recession-hit Asia. But in part, too, it is a result of the drumbeat of unsettling but irrelevant news on the half-dozen, 24-hour television channels specialising in financial news.
That scaremongering stems from people misunderstanding what drives America's economic machine. Boris Yeltsin does not, and neither his ill-health nor his inability to turn Russia into a proper capitalist, free-market state can affect America much. Devaluation and a clapped-out banking system in a country that accounts for 1% of American exports might provide a reason for Bill Clinton to visit in a forlorn effort to seem presidential, but they hardly provide a reason to worry about America's economic prospects.
Clinton's zippergate problems are similar. He does not control the economy. Millions of consumers making millions of decisions every day do, as do entrepreneurs who respond to those decisions. And what limited power Clinton does have is constrained because the opposition Republicans control Congress, his own party is unwilling to follow his lead in matters such as trade policy, and his authority has been undermined by his sexual behaviour and infamous lack of veracity. So unbelievable is Clinton that the White House had to send Robert Rubin, the treasury secretary, before the cameras to look Americans in the eye and assure them the economy "remains sound".
It is. Although drowned out by the roar of Wall Street's roller coaster, most recent news is as good as one could want. New-home sales in July were almost 10% up on 1997, and builders say they can barely match demand. Factory orders rose 1.2%, causing the backlog to rise a bit, signalling a future rise in output. Car sales, too, continued to boom. Chrysler broke its August record with a 4% gain; Toyota also set a record, with its luxury Lexus selling in huge numbers, even after what one executive called "a pretty ugly week on the stock market". It seems the housing and car markets continue to benefit from the fact that "the critical interest rates that affect our economy are way, way down," to quote Rubin.
What happens in the next few months will depend on the relative strength of two conflicting forces: the drag on consumption created by wealth shrinkage and the stimulative effect of lower interest rates. Reduced wealth might prompt consumers to rein in spending but economists reckon not by enough to produce a recession. They say that even if all the share-price gains of the past three years are wiped out - a further drop of more than 25% - gross domestic product will be only 1% lower than it would otherwise be.
On the plus side, interest rates are falling, and Alan Greenspan, the Federal Reserve chairman, is being urged to cut them further, despite continued labour-market tightness. Advocates of loose money say real interest rates are at a post-1989 peak, lower American rates would enable Asian countries to drop rates without triggering further capital flight and there is no sign of domestic inflation.
Whether the Fed eases when its monetary policy committee meets next month is of less importance than the fact that the economy is sufficiently inflation-free to allow Greenspan to lower rates if he deems it necessary. Add to that the room for relaxing the stringent fiscal policy that is producing a budget surplus, and officials have the tools to fend off recession, should it rear its ugly head. Unfortunately, history suggests it is far from certain that those tools will be used in a proper and timely fashion.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.