The Road Ahead
Economic models come up with two very different futures.
11:00 PM, Jan 5, 2004 • By IRWIN M. STELZER
AS ECONOMIC FORECASTERS cranked up their models at the end of last year, many pored over the printouts and decided that Robert Browning had it right when he wrote, "Never glad confident morning again." The economy seemed in such bad shape that the Democrats looked forward to teaching another Bush that "it's the economy, stupid." The unemployment rate was 6 percent and rising; the president's tax cuts threatened fiscal meltdown; the trade deficit was heading for a succession of records; the chairman of the Federal Reserve Board was warning of "corrosive deflation"; and the president had just fired his economic team.
Worse still, George W. Bush seemed to have little time for economic policy, distracted as he was by organizing the defense of the realm, and planning for the unseating of Saddam while simultaneously fighting a rearguard action against France and other enemies of America at the United Nations.
In the event, things turned out rather well, and not only in Iraq. So well that most economists expect 2004 to be a banner year. John Makin exults that "We find ourselves at a point where the performance of the U.S. economy is about as good as it gets." Only if policymakers are frightened by their critics into believing that taxes must be raised to throttle rising deficits can 2004 turn out to be a bad year, concludes Makin.
Economists at Rochdale Investment Management in New York are equally cheerful: "As the U.S. economy fires on all cylinders, we are optimistic about the prospects for continued growth through 2004 and 2005," with real GDP growing at a rate of between 3.5 percent and 4 percent this year. Morgan Stanley is more optimistic, predicting 4.7 percent growth. And Goldman Sachs captions its latest advisory, "Firm Growth, Extremely Low Inflation."
WITH ALL OF THIS CHEER, it seems the best service I can perform for our readers is to point out what it is that these estimable forecasters do not, and cannot be expected to know. The most obvious is the course of the reconstruction of Iraq. If the situation there deteriorates, the economy might suffer the double whammy of a loss in business confidence and a budget deficit rising so rapidly that interest rates rise. Worse still, an anti-business, pro-regulation, high-tax Democratic candidate such as Howard Dean might find his way into the White House.
Nor can we confidently predict the course of oil prices, since these are not set by the forces of supply and demand in a competitive market, but by a cartel not famous for showing consumers any mercy. It is not impossible to imagine a situation in which Islamic fanatics somehow curtail Saudi output, or rising demand from China and the United States coincides with an inability of Russia, Venezuela, Nigeria, and Iraq to step up production, and a Saudi adherence to its policy of curtailing output.
Then there is the danger of policy failure. Remember, Bush is under pressure to woo protectionist-minded voters in important states such as Ohio. Remember, too, that the Bush administration has been pressuring the Chinese to revalue their currency upwards. If the White House gets its wish, it might find that China's willingness to continue acquiring dollars and recycling them by buying Uncle Sam's IOUs will diminish, pushing up interest rates in the United States and turning the so-far orderly decline in the dollar into a calamitous fall.
Finally, the Fed might just have it wrong. It has decided to keep interest rates low, despite the soaring federal deficit, the falling dollar, and rising commodity prices. Makin thinks chairman Alan Greenspan is right to sit tight, since there is enough excess capacity to accommodate substantial growth without unleashing inflation. But Stephanie Pomboy, of consultants Macromavens, sees things differently. "Far beneath the surface," she writes, "the tectonic plates under the U.S. economy have begun to shift, revealing a molten lava river of inflation below. . . . The seeds of domestic pricing power have been sown."
THE DISCERNING, and even the casual reader, might have noticed that I have so far avoided stating my own view. That is in part because I wish to be eligible for Margaret Thatcher's description of one of her advisers--"that remarkable person, a very modest economist . . ." and in part because I am skeptical that even the most sophisticated models can capture the myriad cause-and-effect relations among the phenomena that interact in a modern industrial/service economy--as the Soviet Union's best and brightest economic planners eventually learned. Moreover, in the end any model can do no more than project past relationships into the future, perhaps with adjustments here and there to reflect some change the analyst believes makes the past less than prologue.