Magazine article Insight on the News

Well-Tempered Economy Could Strike Sour Note

Magazine article Insight on the News

Well-Tempered Economy Could Strike Sour Note

Article excerpt

President Clinton and Federal Reserve Chairman Alan Greenspan are sometimes at odds, but lately they seem to concur that the economy rarely has been better. Jobs are up, they say, inflation is down and near-term prospects for growth are pretty good. To flavor their stew, administration officials now claim a surge in productivity will allow wages to rise in 1995 without putting pressure on prices.

Agreement between the White House and the Fed is always nice. But when two old saxophonists like Bill Clinton and Alan Greenspan start playing in the same key, it is probably time for prudent investors to listen carefully to the entire economic orchestra.

Job growth in the current expansion has been the weakest of any postwar recovery. Four-fifths of the 3.8 million private sector jobs added since first-quarter 1991 were in only three industries -- retailing, business services and health services. For the most part, these new jobs have involved hours and pay that were below national averages. The three best-paid industries -- mining, construction and the transportation/public utilities group -- added a mere 64,000 jobs from early 1991 to mid-1994.

The pending overhaul of health care likely will create new barriers to job gains. The president describes his proposal to require companies to pay 80 percent of health benefits -- the "employer mandate" -- as an alternative to a tax increase. That is not true. The employer mandate is a de facto tax, which individual Americans ultimately will pay. Whatever Congress decides to do to the health system, the result will add to payroll costs. That'll be painful, but in the end reduced investment returns are likely to be the most insidious.

The White House is projecting that profits will decline as a percent of gross domestic product from 1994 through 1999. Apparently, Clinton hopes investors will pay for a big part of universal health care. Taxing productive investment to subsidize consumption of health care would be the worst possible outcome. Lower rates of return mean lower net investment. In turn, less investment suggests that productivity and living standards will continue to stagnate.

During the last 50 years, profits have declined steadily both as a share of national income and as a percentage of corporate equity. To no one's surprise, net investment in fixed assets also declined in relation to net national product. Draw a chart, and the lines move together. This decline has had a profound impact on life in the United States.

Reduced investment limits the stock of tools available to help workers do their jobs. …

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