THE ECONOMIC squeeze that America needs has already begun. We are entering an era in which our living standards will decline -- or at least stagnate. This slowdown will help solve our trade and debt problems, but it won't feel good.
The squeeze will take one of two forms. Let's call them the Painful Version and the Very Painful Version. We have some control over which one occurs. We aren't going to be able to avoid them both.
The most recent economic statistics show that the Big Squeeze is upon us. The United States, having lived well beyond its means for half a decade, is finally moving toward a healthier export-led growth. Instead of relying upon the sales of goods and services to the American consumer to buoy our economic growth, we are beginning to turn our sights to overseas markets. The consumer-spending spree that fueled the post-1982 economic expansion is petering out. No longer are Americans indulging themselves at ever-rising rates on everything from hamburgers to Hondas.
Last October's stock-market crash seems to have given consumers a cold-water bath. A government report released the week before last showed that consumer spending actually fell at a 3.2 percent annual rate in the final three months of 1987. The steep drop stirred fears of a 1988 recession. But even if those fears prove unwarranted, the trend toward weakness in consumer buying is unmistakeable. For all of 1987, consumption rose a slim 1.8 percent, after accounting for inflation.
At the same time, the figures showed, rising sales of U.S. products abroad helped keep the economy expanding. The Reagan administration naturally sought to focus attention on this export boom -- which, in itself, is certainly good news. Officials hailed it as fresh evidence that the cheap dollar is helping, slowly but surely, to shrink the huge U.S. trade deficit. The flood of imports is abating too, they pointed out.
What they didn't mention was the flip side of those developments -- the fact that the need to sell more goods abroad, and buy less from overseas, means fewer goods for Americans to enjoy at home. We will be shipping more refrigerators to the Middle East and importing fewer shirts from Taiwan. That's good for the economy, but after years of buying with abandon, it may be uncomfortable for us consumers.
That's what the squeeze is all about. If we're both smart and lucky, we'll endure merely the Painful Version -- a prolonged flattening in the level of consumption, accompanied by continued growth in the overall economy, perhaps interrupted by a mild recession. Most forecasters believe we'll muddle through 1988 without a slump, and conceivably the economy could expand for several more years thereafter.
But make no mistake: The Painful Version will live up to its name. It involves a sea change in the economy, with unpleasant ramifications for the lifestyles of millions of Americans.
In 1988 and for several years beyond, growth in consumer spending isn't likely to match even the sluggish 1.8 percent boost recorded last year; many forecasters predict a pace of less than one percent. This will be a jolt after the rapid boosts that American families have come to expect. From 1983 to 1986, real consumer spending soared at an average annual rate of over 4 1/2 percent. To see what such a change can mean, let's look at how it would affect the average American household in dollar terms, using a typical forecast of the economy compiled by Data Resources of Lexington, Mass.
The forecast shows that average household spending, which was about $30,000 in 1987, will increase about $945 by 1990, excluding the effects of inflation. By contrast, from 1983 to 1986, such spending rose by nearly $4,000.
Some families will hardly notice the slowdown; they are the ones who out-earn most others to begin with and already have so many gadgets that they have trouble finding the counter space to store them.
But clearly, a lot of households will face some difficult adjustments in their aspirations for material progress. And since the spending increase projected by Data Resources is an average, with some households doing better and others worse, a lot more households than before will experience actual declines in their living standards.
Are Data Resources' figures based on some doom-and-gloom forecast? Quite the contrary. The firm predicts no recession during the period. And there is scant basis for hope that consumer spending could rise more rapidly than Data Resources projects. The forces that will suppress consumption over the next few years are only beginning to exert their effects.
American purchasing power is being crimped by rising import prices, a trend that is about to accelerate. A dollar now converts to many fewer marks, yen or francs than it did a couple of years ago. This fall in the dollar has erased foreign suppliers' profit margins and these firms are certain to raise their prices faster this year than the 9.6 percent increase they recorded in 1987.
Another trend that will cause an increasing drain on the amount of money available for spending here is the growth in U.S. payments on burgeoning debts owed to foreigners. The United States is just starting to foot the bill for the debt it incurred during the 1980s while borrowing money from abroad to finance its trade deficits. Late last year, the Commerce Department reported that for the first time in 29 years, the United States paid a larger sum to foreign investors than it gained from U.S. investments overseas. The net amount transferred abroad will inevitably rise in the future.
Finally, individual incomes will probably be compressed by new actions to cut the federal budget deficit after the next president takes office. To be sure, politicians may continue to balk at major tax increases or cuts in benefits, so perhapsHow much we, as a nation, have to suffer to cure our economic ills depends mostly on how each of us, as individuals, families and voters, choose to behave.
this form of belt-tightening will be less than what's really needed.
Which brings us to the Very Painful Version of the squeeze. Here's the most likely scenario under which the Very Painful Version would arise: The financial markets perceive that the United States isn't making much progress toward living within its means. In particular, the markets see evidence of the sort that surfaced in mid-October -- a U.S. trade deficit that is hanging unexpectedly high.
Foreign investors lose confidence in the ability of the United States to stop its borrowing binge. They start to pull their money out of the country, withdrawing deposits, selling Treasury bonds, dumping stocks. The people who agree to buy these American assets demand higher yields to compensate them for their risk -- which means U.S. interest rates go up. Businessmen and consumers find it harder to borrow. The economy falls into a wrenching recession.
There is considerable risk that the Very Painful Version will occur. The lower dollar is helping to narrow the trade gap, but it isn't helping as much as many had hoped. U.S. companies are selling vast quantities of goods abroad, but their ability to export a lot more is open to question. Having closed down some of their capacity when U.S. manufacturing was in the doldrums, key industries, such as paper, chemicals and aluminum are operating at or near capacity levels.
The way to minimize the likelihood of the Very Painful scenario is obvious. Consumption has to be curbed -- even more than is already taking place. Slower growth in consumption will reduce the amount of imports Americans buy as well as the amount of domestically produced goods and services. That will give U.S. manufacturers room to use more of their capacity for exports. It will also allow savings to increase, providing the funds that businesses need to build new plant and equipment.
Achieving this goal without causing a recession will be tricky; consumer spending accounts for nearly two-thirds of Gross National Product, and a sharp drop would send the economy into a tailspin.
But the point is, we will only risk making matters worse if we try to escape the pain altogether.
An aggressive effort by the Federal Reserve to pump up the domestic economy, for example, would lead to inflationary shortages in those industries already swamped by export orders; the reaction in the financial markets would surely be disastrous. A failure to get the federal budget under control would have the same negative effect on investor confidence. Of course, too rapid a cut in government spending, or too sharp a rise in taxes would deepen a recession already underway. But it's hard to take the possiblility of over-ambitious congressional action very seriously. The bigger threat is failure to make steady progress against the deficit.
In the end how much we, as a nation, have to suffer to cure our economic ills depends mostly on how each of us, as individuals, families and voters, choose to behave. If we go on with our current patterns of buying and borrowing while demanding low taxes and abundant public spending, the trade and budget deficits will stay huge, the dollar will fall more and the resulting recession will be still deeper and harsher. Just as in the 1970s, the efforts of most Americans to shield themselves from the inevitable cost of the oil shocks translated into a far more costly spiral of inflation, so we run the risk of additional self-inflicted pain if we cannot summon the will to accept the adjustments we need to make.
Paul Blustein is a Washington Post reporter.