Compared with its condition a year ago, the American economy is probably in less danger now--in the sense, at least, that the dangers are more visible. More people are aware of them, and are trying to deal with them. There's no longer the easy sense that the country is only passing through another routine recession that will shortly cure itself. The questions for 1983 are pretty clear:
Will interest rates continue to fall far enough to allow a recovery of production and employment--or will fears of budget deficits and inflation keep them high?
Will governments keep their markets open to foreign trade? Or will they cave in to the shrieks of threatened industries and clamp down on imports--continuing the past year's worldwide spiral of lost export sales and lost jobs?
Will the fragile status quo survive in the Persian Gulf region? Or will further war and revolution tip it over again and plunge the world into its third oil crisis on the 10th anniversary of the first one?
How will Americans cope with the enormous structural change in their economy, and the decline of the traditional labor-intensive heavy industries like autos and steel? Will they demand last-ditch attempts to prop up the sinking giants? Or will they find ways to move people into other kinds of jobs with better prospects?
For the past three years, the United States has been trying valiantly to choke off the great surge of inflation that began during the Vietnam War. It is turning out to be much harder than most people had expected.
One reason is that people don't change their habits quickly. Working people and their unions are accustomed to keep pressing for higher wages and benefits. A few weeks ago, Chrysler's Canadian employees were on strike, and its American employees threatening to join them, to force higher wages out of a company already at the limits of its resources. It was a poignant demonstration of the power of an obsolete idea.
But it's not only unions that are in the grip of past experience with inflation. The long years of high inflation rewarded borrowers but left them with huge accumulations of debt. They had expected continued inflation to help them pay off those mortgages and loans, and the rapid drop in inflation now threatens many of them--from individual homeowners to foreign governments--with bankruptcy.
The Reagan administration was not well equipped in most of its first two years to deal with an international recession. As to policy, its doctrine was a cheery assurance that the best and only thing that the United States could do for the rest of the world was to get a recovery going here. The administration has only gradually come to understand the extent to which the international and domestic economies influence and constrain each other. A stable recovery in this country, while other nations' economies continue to decline, is not possible.
In terms of people, the original Reagan administration was very short at the top level of international economic and financial experience. At the State Department, a gulf of personal dislike opened early between the secretary, Alexander Haig, and his undersecretary for economic affairs, Myer Rashish. Haig eventually forced Rashish out, after a prolonged bureaucratic stalemate, and never filled the job before he himself was fired last summer. Regarding the European economies, last spring the White House was mainly interested in its campaign to block the Soviet gas pipeline and, largely because of that, the Versailles summit meeting on economic policy last June was a sour and unsuccessful affair.
At Treasury, the incoming secretary, Donald T. Regan, arrived with no clear sense of the international situation, while his staff devoted itself mainly to a highly ideological struggle among the various denominations of supply siders and monetarists. The undersecretary for monetary affairs is usually the department's expert on international finance, but Beryl Sprinkel, who holds the job in this administration, came to it with little previous experience in the field. Of all the federal agencies, the only one with a good grip on the subject of international money was, until last summer, the Federal Reserve Board.
But things seem to be looking up a bit. George Shultz, secretary of state since July, is an economist and a former secretary of the Treasury with a longstanding interest in the world economy. The new chairman of the Council of Economic Advisers, Martin Feldstein, seems to have a good deal more influence within the administration than his predecessor, Murray Weidenbaum, ever did. Whether because of the arrival of Schultz and Feldstein or for other reasons, Regan at the Treasury has suddenly become fired with a strong and lively sense of his international responsibilities. He has apparently freed himself, at last, from the doctrinal wars within his department and is giving foreign economic policy the attention that it requires from him. That's progress.
In retrospect, it is evident that in 1973, just a decade ago, the rules of the game changed in ways to which the world has not yet adequately adjusted. It was the year when the major trading countries abandoned fixed exchange rates and let their currencies float.
That affects their internal economies in unexpected ways. It links each country's movements more closely to other countries', making purely national policies harder and more expensive to carry out when they are not in harmony with international trends. You can see the effect in the deepening troubles of France, following its failed attempt to carry out a Socialist program at a time when most of its principal trading partners are under conservative governments. As for the United States--not to mention Germany, Belgium and the Netherlands-- you don't have to be an economist to see that the old Keynesian medicine of deficit spending to cure unemployment no longer works as effectively as it used to.
And 1973 was also the year in which the price of oil quadrupled. The higher price of oil represented a loss of income to the countries that imported it, like the United States. But the United States, like most modern industrial democracies, is not well adapted to absorb losses in income. By consensus, the country had adopted a rule of social equity that, by law or custom, protects most kinds of income from erosion by higher prices. Most of its public financial commitments--Social Security benefits, to take one prominent case--were based on the confident expectation of steady and rapid expansion of the economy. It's a dilemma that American society still hasn't resolved. Everybody claims a right to be kept more or less even with inflation and, where incomes are rigid, there is only one way in which economic decline like the current recession can be expressed. That is the most unfair way of all, through rising unemployment.
The performance of the American economy, even under the strains of this past decade, has been a good deal stronger than it might appear at first glance. This country has been extraordinarily successful, particularly in comparison with Western Europe, in generating employment for the great numbers of young people who entered the labor force in the 1970s. Even now, deep in recession, there are 14 million more people employed in this country than there were in the boom year 1973. But there are also 7.6 million more people unemployed.
The great disappointment of the year 1982 was the recovery that never arrived. Last spring, it seemed clearly in sight by summer. In April, there was wide agreement among economic forecasts that the country was then at the trough of the recession and, within several months, a moderate but solid recovery would be under way.
Its failure to appear was especially odd because, over the summer, there were two favorable developments that the forecasts had not anticipated. At the beginning of July, the Federal Reserve Board--perhaps perceiving that the recovery was behind schedule--changed direction and began pushing down interest rates. Meanwhile, Congress passed a tax bill reducing budget deficits in the years ahead. The result was that, by autumn, interest rates were far lower than any forecast had expected six months earlier. But over the autumn the recession continued and unemployment kept rising. Why?
One reason is that the income tax cut last July had little effect, and spending for personal consumption has risen less than the forecasts expected. Further, business investment has fallen far short of the levels that those spring forecasts showed. Evidently interest rates will have to come still lower before in- vestment revives in this country, let alone abroad.
Another reason, looming even larger, is the sharp drop in recent months of American exports to the rest of the world. That reflects the deepening recession in Europe and the anxious attempts of Third World countries to avoid running themselves farther into debt. The International Monetary Fund has been calling attention to the sharp contraction in world trade this year, unprecedented in the period since World War II. The American unemployment rate shows that it is not only countries like Brazil and Nigeria that are suffering from that contraction.
The experience of the past year reinforces several good rules for Americans to uphold in the coming one.
First, the United States cannot revive its own economy as long as the rest of the world is deep in recession. The American economy is much too dependent on foreign markets to permit that.
Next, the world economy is not self-stabilizing. Sometimes markets collapse, with social and political consequences that not even the most committed of free-market theorists can consider tolerable.
Above all, leadership in reordering and reviving the international economy has to come from the United States. This country cannot afford to devote 1983 to Round Three of the long quarrel over budgets and taxes as though nothing counted but the domestic economy. The inconvenient fact of the matter is that the distinction between the domestic and international economies has become, by 1983, pretty much a fiction.