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The good old bad days
The US economy remains comatose. . . The current slump ranks as the longest period of sustained weakness since the Great Depression . . . Once-in-a-lifetime dislocations. . . will take years to work out. Among them: the job drought, the debt hangover, the defenseindustry contraction, the (banking) collapse, the real estate depression, the health-care cost explosion and the runaway federal deficit. " That's how Time magazine described the dismal state of the US economy - in September 1992.
The passage has again been making the rounds in financial circles, a token reminder that today's pessimism - the forecast of a "lost decade" for US employment by Pimco CEO Mohamed El-Erian, for example - may turn out to be too extreme. Almost before that Time article reached the recycling bin, the US economy was humming again. Real gross domestic product rose 4. 3 per cent, both in the fourth quarter of 1992 and on a year-over-year basis - and for the rest of the decade America never looked back.
The recession that officially ended in March 1991 lasted just eight months, one of the shortest US downturns ever;it took another year to produce consistent job growth. Soon, however, the jobless recovery that helped elect Bill Clinton in 1992 ushered in a decade of prosperity, with 23 million new jobs created. By the spring of 1997, unemployment had fallen below 5 per cent - a 24-year low - yet inflation was holding steady at around 3 per cent, with consumer confidence near an eight-year high. No wonder Clinton was beginning a second term.
Could it happen again? When it comes to financial markets, pessimism is a buy signal. Just when the outlook is bleakest, when investors have liquidated their stocks or sold them short, markets tend to turn up. Can the same be said about economic pessimism? One should never underestimate America's capacity for self-renewal, its spirit in the face of adversity. The unexpected Clinton-era boom owed a lot to a technology-driven leap in productivity growth, which had slumped to about 1. 5 per cent from the mid-1970 s to mid-1990 s, then bounced back to 2. 5 per cent. Right now it's hard to see what might come along to goose US productivity in the same way, but to quote Melanie Griffith's character in the George H W Bush-era movie Working Girl, "You never know where the next big idea might come from. "
That said, there are good reasons to believe a 1990s-style surprise - strong job and economic growth - won't materialise in this decade. The foundations for growth that were in place then are missing now. Take declining deficits. The end of the Cold War saw defence spending fall from 5. 2 per cent of GDP when Clinton took office to 3 per cent in 2000.
At the same time, the tech bubble of the last half of the 1990s and a capital gains tax cut in 1997 produced a revenue windfall for the US Treasury as investors took profits. Personal income taxes as a share of GDP rose to a record 10. 2 per cent in 2000 compared with a more typical 8 per cent. The federal government posted its first budget surplus in almost three decades in 1998. It wasn't until 2002 that wars, tax cuts, recession, and a less ebullient stock market conspired to bring the deficit back with a vengeance.
Today, US coffers remain ravaged by the recession that started in December 2007. A combination of falling tax revenues - individual income taxes fell to a 60-year low of 6. 2 per cent of GDP - and soaring government spending produced a $1. 45 trillion deficit last year. Fiscal 2010, which ends on September 30, is expected to show a marginal improvement in the deficit to $1. 3 trillion.
The deficit hole comes just as the baby boomers are starting to retire. Life expectancy is increasing at the same time as the ratio of workers to retirees is falling. The more resources devoted to keeping the aged in the style to which they have become accustomed, the less there is to invest in the future: in new technologies that will raise productivity growth;in the education of our children to enable them to compete in a global workforce;and in plants and equipment that increase the economy's productive capacity. Without these investments - without a 1990s-like burst of productivity growth - the US will find it hard to fulfill its promises to future generations and, at the same time, provide an environment that nurtures the entrepreneurs of the future.
There is one parallel between now and the Clinton era. This election year is shaping up to be a lot like 1994, when the Republicans wrested control of both houses of Congress from the Democrats. It was the first GOP majority in the House in 50 years. In response, Clinton moved to the centre, something that many business leaders would welcome from Obama. Rightly or wrongly, many blame the current confidence slump on Obama and the Democratic Congress. A fiscal policy in flux is not conducive to entrepreneurship.
America's challenges, however, go beyond. As a nation, they demand more in benefits than we're willing to pay for in taxes. "Given the huge amount of expense our overcomplicated tax system imposes on us, fundamental tax reform would be one of the best ways imaginable to stimulate our economy without plunging the country further into debt, " writes David Keating, counsellor at the Taxpayers Union. America would need a national grassroots movement and perhaps a constitutional amendment to force through such a reform. That would be a worthy final act for the baby boomers - and it might help bring back the boom.
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