The Magazine


Feb 1, 1999, Vol. 4, No. 19 • By DAVID FRUM
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A potentially even more menacing danger is taking form across the Atlantic. On January 1, the European currencies ceased to move freely against one another and were fixed relative to one another for the three years remaining until they are scheduled to disappear and be replaced by the single European currency. Fix any of those rates too high, and it will have a deflationary impact; fix any too low, and it will tend to create inflation. And since eleven currencies are joining the European Monetary Union, there were fifty-five exchange rates for the Euro-wizards to set accurately, creating many, many opportunities for error -- and further international monetary instability.

None of this necessarily means that the End is Nigh for the U.S. economy. It's possible the United States may muddle through, with no worse shock than a slowing of growth in 1999. On the other hand, the outlook is not exactly confidence-inspiring. And an economic downturn would have considerable political significance.

The 1990s have been an unusually serene time for the American economy and thus an unusually uneventful period in American politics. It's not true, as President Clinton likes to say, that this is "the best economy in thirty years." Actually, the 1992-98 expansion has had the lowest average growth rate of any since the end of World War II. What it has been is an unusually untroubled expansion. Compare the Clinton prosperity to the Reagan boom. The expansion of the 1980s began in 1983, just as the great surge of people born in the peak years of the baby boom, 1957-62, were looking for their first jobs. The number of women seeking full-time work peaked in the 1980s too, and immigration from war-torn Central America and an oil-busted Mexico surged.

With so many workers to absorb, the economy of the 1980s was always attended by relatively slack labor markets. Not until 1987 did the unemployment rate push below 6 percent, and in only a single month of the Reagan boom -- March 1989 -- did unemployment fall as low as 5 percent. The cohort entering the labor market in the mid-1990s, however, was the small generation born in the 1960s and early 1970s. As a result, even though the economy grew less fast in the 1990s than it did in the 1980s, and even though real interest rates were not much lower, unemployment rates fell much further: Since May 1997, they have remained between 4.6 percent and 5.0 percent.

These numbers -- with a little help from news media that have inexplicably lost interest in such once-favorite topics as homelessness, deindustrialization, and the (still-growing) gap between the incomes of the top 5 percent and bottom 20 percent of households -- may explain why voters have been consistently more likely to say that Bill Clinton's relatively sluggish America is on the "right track" than they were to say so of Ronald Reagan's much more dynamic America. That feeling of economic well-being, in turn, has protected Clinton from being wounded by his administration's scandals and crimes. So far anyway. But now suppose that those happy conditions were to end.

Since 1994, Clinton has offered the Democratic party a devilish bargain: Accept and defend policies you hate (welfare reform, the Defense of Marriage Act), condone and excuse crimes (perjury, campaign finance abuses), and I'll deliver you the executive branch of government. But this bargain can hold only so long as Bill Clinton's grip on the presidency does. If that grip falters -- if a weak economy threatens to cost the Democrats the White House in 2000 -- the Clinton bargain will cease looking like clever politics and start looking like a disgusting betrayal of Democratic principles.

Nor will Clinton's standing in the country be more secure. Again since 1994, Clinton has survived and even thrived by deftly balancing between right and left. He has assuaged the left by continually proposing bold new programs -- the expansion of Medicare to 55 year olds, a national day-care program, the reversal of welfare reform, the hooking up to the Internet of every classroom, and now the socialization of the means of production via Social Security. And he has placated the right by dropping every one of these programs as soon as he proposed it. Clinton makes speeches, Rubin and Greenspan make policy; the left gets words, the right gets deeds; and everybody is content.