As a public-relations phenomenon, the recovery is new Coke. Almost no one says anything nice about it. The latest revision of economic growth won’t enhance its image (gross domestic product, the economy’s output, rose at only a 0.9 percent annual rate in the first quarter). The recovery is called “feeble” and “lackluster.” Clinton, plugging his own policies, is among its biggest detractors. The White House wants to take credit for accelerating economic growth.
Well, Clinton shouldn’t want it to go too much faster. This grudging expansion tends to suppress inflation and promote productivity. Companies can’t easily raise prices and, to improve profit margins, must increase efficiency. A much quicker recovery might be more satisfying now, but it would create bigger risks later. Jimmy Carter also complained that the economy was growing too slowly when he became president. He succeeded in temporarily raising growth by encouraging easy credit. That was a mistake.
Carter “stuck too long to the stimulative . . . policies promised in the 1976 presidential campaign, to end what we called ’the Ford recession’,” as Stuart Eizenstat, Carter’s chief domestic adviser, recently wrote. Between 1976 and 1979, inflation jumped from 5 to 13 percent. Inflationary economic policies, not a 50 percent jump in oil prices, were the cause. Clinton ought to learn from this. He needs steady growth that slowly cuts unemployment and raises incomes-not a supercharged economy that might worsen inflation and trigger a recession around the 1996 election.
Despite its lousy image, the recovery is not a complete dud. We are now two years from the bottom of the recession. The unemployment rate is 7 percent. Two years after the 1974-75 and 1981-82 recessions, the unemployment rates were 7.4 and 7.3 percent respectively. Some of the recent slowdown in economic growth stems from the March snowstorms. People shopped less; store inventories rose.
Nor is it true that the recovery is “jobless.” The government has two monthly employment surveys. One (a survey of households) shows an increase of 1.9 million jobs from its low point. The other (a survey of businesses) shows a job rise of 1.2 million from its low point. “First we had George Bush, who would never admit there was a recession. Now, we have Bill Clinton, who never admits that there’s a recovery,” as economist Susan Sterne of Economic Analysis Associates aptly puts it.
Indeed, the economy has changed less than popular psychology. There’s a new insecurity. Big companies-the IBMs and GMs-now longer seem safe havens. White-collar and middle-aged workers feel more vulnerable. And they are. As a society, we’re aging, Since 1970, the population’s median age has risen from 28 to 33. Naturally, any unemployment increasingly hits older workers. So, too, with white-collar workers. They must suffer more from unemployment, because most new jobs are in the service sector.
But just because people feel vulnerable does not mean (as some commentators suggest) that the economy has lost its capacity to generate new jobs. That argument seems seductive. It goes like this: companies are becoming more productive and can meet their sales with the same number or fewer workers;therefore, new hiring and employment stagnate. Although this is often true of individual firms or industries, it isn’t true of the economy as a whole.
When a company becomes more efficient, the gains don’t simply vanish. They raise someone’s income and buying power in one of three ways: (a) lowering prices-companies cut prices to expand demand or beat competition; (b) raising wages or fringe benefits-companies can pay more, or (c) increasing profits-shareholders benefit from higher dividends or stock prices. Sooner or later, the increased income is spent on consumer goods or new investment and creates new jobs. Obviously, this process doesn’t occur instantly. Companies’ efforts to improve productivity may temporarily hurt job growth. But ultimately, productivity gains raise spending, living standards and employment.
One reason the recovery looks so haggard is that we’re in the midst of this messy process. We can still see (and feel) the effects of the recession’s industrial shakeouts and corporate overhauls, even while they create conditions for future growth. In other ways, though, the constant disparaging of the recovery is misleading. True, economic growth has been slower than in past recoveries. But you need to qualify this statistical fact with two other statistical facts.
Debt down:First, the recession itself was fairly mild (GDP dropped 1.8 percent compared with 4.1 percent in the 1973-75 recession and 2.7 percent in 1981-82). This recovery has been less robust, in part because there was less to recover from. Second, economic growth is slower because labor-force growth is slower. The number of new workers (and consumers) is one of the main engines of economic expansion. In the 1970’s, the flood of baby-boom workers caused the labor force to grow 2.6 percent annually. Now, the underlying increase is half that.
What has also hurt growth is the legacy of the 1980’s debt. Since 1990, consumers and businesses have sacrificed some spending to repay and refinance old loans. But this process may be ending, as debt burdens drop. Consumer debt payments (including mortgages) have fallen from a high of nearly 14 percent of disposable income in late 1989 to about 12 percent now, estimates economist Sterne. Meanwhile, a study by the Federal Reserve Bank of New York finds that business interest payments have decreased from 25 to 20 percent of corporate cash flow since late 1989.
Every recovery has its own rhythm. Surely there are now threats to continued growth, as there always are: from government policies to weak demand from abroad. I don’t know what will happen, but I do have a bias and a hunch. The bias is for a sober recovery that, for all its uncertainties, would produce more lasting income and job gains. The hunch is that’s precisely what we’ve got.
