October 9, 1987
"Plodding is Good News; Surging would be Better"
San Jose Mercury News
By Timothy Taylor
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AS of this month, the economy has grown for 59 consecutive months, the longest
such streak in U.S. peacetime history since 1854.
What happened in 1854, you ask? Well, that's as far back as decent statistics
go. If the statistics went back further, perhaps the Reagan administration could
boast that it had presided over the longest peacetime economic expansion in U.S.
But this impressive economic climb has gotten no respect. People keep complaining
that growth is "lackluster" or "muddling along" or "sluggish."
One best-seller after another has warned how the huge budget and trade deficits,
or the decline of the manufacturing sector, or the tax reform bill, or the resurgence
of OPEC, or sunspots or fat thighs or something was about to cause recession,
depression and economic apocalypse.
While there can be any number of political disagreements about how growth has
affected various groups, 59 straight months of growth is undoubted, unabashed
good news. Economic growth has its problems; it surely doesn't make a society
But at least in periods of growth a society can afford to try for improvement.
If you oppose growth, you've forgotten how painful recession can be.
However, the current surge of economic growth really deserves only two cheers.
After all, growth has always been the normal pattern of the U.S. economy as an
expanding population has gained in skill and experience and used ever more sophisticated
and plentiful machines to increase output. The questions are always: whether the
growth is fast enough, and how long it will last.
After strong 3.6 percent growth in 1983 and explosive 6.4 percent growth in
1984, the economy slowed to 2.7 percent growth in 1985 and 2.5 percent growth
in 1986. This year appears to be following that slower pace. This difference may
not sound large -- what's a couple of percentage points? -- but such small differences
eventually compound into big differences.
Imagine, for example, that two countries start out equally wealthy, but one
grows at an average annual rate of 2.5 percent while the other grows at an average
annual rate of 3.5 percent. The difference would be barely perceptible for a few
But after 30 years, the slower- growing country would be only three-quarters
as wealthy as the faster-growing one. Since the rest of the world economy is not
about to stand still, accepting slower growth will move a country from relative
wealth to relative poverty in a few generations.
But while slow growth in the U.S. economy should be a major concern, the past
few years are the continuation of a slow trend, not the start of one. Over the
last 20 years, when recessions and recoveries are averaged together, the growth
rate of the U.S. economy has been 2.6 percent. Over the 20 years before that,
growth averaged 3.6 percent.
I'd like the U.S. economy to return to that earlier, faster rate of growth.
One step toward that goal would be to encourage savings, starting with reducing
the borrowing of the federal government, so that more money would be available
for businesses and entrepreneurs to borrow and invest.
But it makes little sense to blame the current surge of growth for slowing
down to a speed that's been the average for two decades. Maybe if you're seeing
a play, it's more fun to have extremes of brilliance or incompetence, rather than
watching the unrelentingly average. But for the economy, a sustained average is
healthier than extremes of boom and bust.
A lot of people seem to see any period of economic growth as a card house,
with each succeeding month of growth shakier than the last. However, periods of
economic growth don't die of old age. They need to catch a particular disease,
and all of the recessions since the 1960s have followed the same pattern.
Inflation increased. The Federal Reserve Bank fought inflation by reducing
growth in the money supply. This step pushed up interest rates. The increase in
interest rates slowed down consumer purchases and business investment, which led
to a recession.
If this historical pattern holds, increasing inflation is the warning signal
of recession. While current inflation remains quite low, there are some threatening
signs. Oil prices have increased -- and oil price increases helped trigger two
recessions in the 1970s.
The U.S. economy continues to spend far more than it produces, and borrow the
difference from abroad. This process of too many dollars chasing too few goods
could lead to inflation, as it did in the late 1960s. Even economic growth itself,
by reducing unemployment of people and machines, can have the unintended effect
of leading to shortages which cause inflationary increases in wages and prices.
Inflation doesn't appear poised to take off in the next few months, but a recession
won't hold off forever. Economists can't predict when it will hit.
Beryl Sprinkel, the economist who heads President Reagan's Council of Economic
Advisers, said in an interview a few months ago: "The current extended period
of slow growth is largely the result of chance, involving countervailing fiscal
and monetary forces, and trends in particular sections of the economy. Inevitably,
the economy will either speed up or slip into recession."
Such honesty from a government official is a little disconcerting, but he's
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