THE GLOOM-AND-DOOM crowd seems to have been silenced, or nearly. Not long ago they were telling us that budget deficits, trade deficits, an overvalued dollar and so on would bring us to our knees. Here in the Outlook section you've read several of the many dire forecasts that haven't come true. Instead of gloom, we have boom.
So are we out of the woods? Or perhaps we can't see the forest for the trees? Or maybe we need some other old saw to cut through what's going on. In fact what's going on is the economic equivalent of the Washington Senators winning the World Series. To say that we are beating the odds is rather an understatement.
"We're in a new world," observed Richard Whalen, a Washington consultant on economic issues. "We've gone through the looking glass." We are having a low-inflation economic boom under conditions which -- if predicted five years ago to a convention of all our economists -- would have been laughed off the blackboard as preposterous. We have the largest budget deficits in modern times, the worst trade deficits, the most overvalued dollar -- and the best economic performance in 30 years.
Some, like our president, think we should relax and enjoy it. Others, like his budget director, think we're in grave danger. But David Stockman and the others who still worry are trying to peddle bad news in good times. It doesn't play in Peoria -- or anywhere else.
Why not ride with the tide of good news? The economists who remain skeptical have been so wrong so often, they're probably wrong again when they warn of trouble to come -- right? Put it that way to Alan Greenspan, chairman of Gerald Ford's council of economic advisers, and you get this reply:
"If an 80-year-old lives to 90, and then to 100, do you then conclude that he'll live forever?"
"May you live in interesting times," goes the old Chinese curse. By any definition, we do. Today's economic conditions are literally without precedent in many respects:
* Our national debt is out of control. This statement is not news; only its relevance remains in doubt. Debt and interest on the debt are both growing considerably faster than the economy itself, even though the economy really is booming. A decade ago interest payments on the national debt (that is, the interest paid to holders of Treasury bills and other government securities) was $23 billion, or 7 percent of the federal budget. In the current fiscal year interest payments will be $130 billion or so -- 14 percent of the budget. In 1990, according to the Congressional Budget Office, we can expect to pay $230 billion in interest on the debt, nearly 17 percent of the budget.
This means the government will absorb more and more of the money available for investment of all kinds. Every dollar the government borrows is a dollar that cannot be invested in new enterprises or new productive equipment.
We've run up big debts before, particularly in World War II. But this is a peacetime boom. Nevertheless, we are going farther and farther into the red.
* American industry no longer satisfies American demand. This is the sort of statistical fact that rarely gets beyond the economists' discussions, and isn't easy to grasp. But it is worth pondering, and it is certainly a symbol of the fact that we have indeed "gone through the looking glass." The statistics demonstrate that in some literal sense, too many of our goods are no longer competitive with those made elsewhere.
Traditionally, this most productive of all economies produced more than Americans could or would buy; the surplus was sold overseas. But for the last two years, Americans have consumed more than they have produced. Of course we always imported lots of goods, but we always exported about as much as or more than we imported. No longer.
* The United States is on an import binge. Imports have risen 55 percent since their low point in the 1982 recession, a rise that is more than twice as fast as in any previous recovery from a recession. In particular sectors of the economy the import figures are mind- boggling. For example, imports of clothing and textiles went up 43 percent in 1984 alone. Not long ago we imported about 10 percent of all our machinery; now we're importing 25 percent.
* Our boom is weird -- it follows no previous pattern. For example, industrial production is not growing as fast as the economy as a whole, largely because we are importing so much of what we are consuming. Unemployment, stuck at 7.4 percent, is much higher than in previous, comparable booms, and it shows no sign of going down. Europeans are awed by America's ability to create new jobs, and we have created millions. But we have left millions of adult Americans, particularly young people, out of work, and the economists seem to agree that the situation will not improve significantly, even if the boom goes on.
Particular aspects of our boom clearly aren't what we'd like, or what an unfettered marketplace would produce. The tax laws distort the market. They make some kinds of investments much more profitable, and thus much more appealing, than others. Perhaps the best example involves new construction. In 1980, the last pretty good year for growth before 1983, the value of all industrial construction -- new factories, warehouses, etc. -- was $13.8 billion, while commercial construction -- office buildings, hotels, stores and shopping malls -- totaled $30.1 billion.
Last year, industrial construction totaled $14.4 billion -- just a little higher than in 1980. But commercial construction jumped to $49.4 billion, a two-thirds increase over 1980. Put another way, before the impact of the 1981 tax law was fully felt, we spent two dollars on commercial construction for every dollar spend on industrial building. Now that ratio has ballooned to 3:1.
But there is no reason to think our need for new office buildings and shopping centers has burgeoned so suddenly. Investors have just taken advantage of the extremely generous tax treatment now given to commercial construction. We have vacant office space in most major cities -- enough in Houston, for example, to accommodate every office in downtown Denver.
This boom is also wildly uneven. While some sectors prosper, others -- the best example is the farm economy -- teeter on the edge of genuine disaster.
* Our currency has risen wildly to heights undreamed of just a few years ago. Since 1980, what the economists call the "trade-weighted" value of the dollar -- a comparative index meant to show changes in the dollar's value relative to the currencies of other industrial nations -- has gone up 75 percent. That is one reason why a fancy French dinner that costs $150 or more in Washington can be had in Paris -- in the original, usually tastier version -- for $75.
The continuing rise of the dollar defies economic logic, and the poor economists have all but given up trying to predict its future movements. In interviews last week, half a dozen economists admitted that they will now predict only that the dollar will probably stay about where it is -- not because they have any confidence this will happen, but because they don't know what will happen.
Economists of all persuasions used to agree, in theory, that the currency of a country with huge and rising budget and trade deficits would appear weak in the marketplace. Speculators would inevitably push its value down.
If the same country also had declining interest rates (meaning foreign investors would be getting a lessening return from investments there), the downward pressure on its currency would be all the greater. Last year our interest rates came down substantially.
Nevertheless, the dollar keeps climbing. This has good consequences as well as bad. A stronger dollar reduces inflation by holding down the price of imports -- the higher the dollar is compared to, say, the franc, the more French machinery or wine one dollar can buy. (The dramatic reduction in inflation in the last four years is another phenomenon that defied economists' predictions.)
But a high dollar clobbers American exports, whose prices measured in foreign currencies keep going up, even if they hold steady in dollars. A high dollar also hurts American products by making competitive imported goods relatively cheaper. David Hefter, an economist for DuPont, said industrial production would rise about 3.6 percent in 1985, but it would have risen 5 percent if the dollar's value was 25 percent lower -- which other economists say would be a truer reflection of its intrinsic value.
Our exports are plummeting as a percentage of all world trade -- from 13 percent in 1980 to 9 percent last year. Salomon Brothers, the New York investment bank, predicts no growth at all in U.S. exports this year. Some of our finest corporations are hit the hardest. Caterpillar Corp., for example, exported machinery worth $3.51 billion in 1981; last year its exports were $1.77 billion.
So what happens now? There is an optimistic answer and a pessimistic answer, and you can take your pick.
Numerous respected economists say, in effect, that you can bet on a miracle, pray for political courage in Washington or get ready for big trouble -- though it may not show up for years.
Greenspan said last week that "the inevitability" of serious, adverse consequences from the budget and trade deficits "strikes me as almost self-evident."
"If you make an issue of it, I will state it without qualification," he replied.
Greenspan, like many other economists, continues to believe that an out-of- control budget deficit just can't be tolerated. Eventually, they say, the Treasury's borrowing will compete with the private sector's in a way that will push up interest rates (when the demand for money exceeds the supply); or the dollar will fall, causing an outflow of capital, which would also force us to raise interest rates to retain foreign investment in our economy; or steady erosion in domestic production plus rocketing imports will push the economy into a recession, or some combination of all these factors will bring on trouble.
These "mainstream" economists deny that earlier predictions of doom have been wrong; they acknowledge only that doom has been avoided so far. Greenspan recalled the story of the man who, in a financial squeeze, decided one day not to feed his horse. The horse did fine, so the man did not feed him a second day, then a third and a fourth. The horse did fine for a week, "then he dropped dead."
Similarly, many economists think the current value of the dollar cannot be sustained. MIT's Lester C. Thurow, noting the dollar's rise against all the rules of thumb, observed: "If water is running up hill, has gravity been repealed? Or is something else going on?" Thurow thinks the dollar may be rising astride a speculative bubble.
In the economic and stock market boom of the l920s, Thurow noted, our gross national product peaked in 1928, but the stock market kept flying higher for a year. Even "the smartest man in the world," Thurow said, was vulnerable to speculative fever. He meant Sir Isaac Newton, who in 1720 made a 7,000- pound profit in the famous South Sea Company "bubble" on the London stock exchange by selling his shares at an opportune moment.
"Unhappily," recounted economist Charles P. Kindleberger in a book on speculation, "a further impulse later seized $, an infection from the mania gripping the world that spring . . . . He reentered the market at the top for a larger amount, and ended up losing 20,000 pounds."
Or, everything's coming up roses, so stop worrying. James Smith, the economist for Union Carbide, is one of many who think so. We're back from the brink of the international debt crisis, Smith notes. We've got booming investments in research and development for future growth; Congress will take the steps needed to at least begin to control the deficit; we're poised for a replay of "the golden 1960s."
Such Reaganesque optimism is clearly infectious. It better be justified, because at the moment, no politician can see the political benefits of actually solving the budget deficit problem which seems to be at the root of today's -- well, situation. Ironically, a little pain now to right the budget deficit might go a long way. If one or another catastrophe does strike, the pains will be enormous -- and today's politicians will have no place to hide.