Despite all the worries on Wall Street, the American economy has
been performing remarkably well - if, for the moment, you leave
aside the big trade deficit, the budget deficit, the weak dollar and
the growing dependence on foreign capital.
In its new Economic Quarterly, the Morgan Guaranty Trust Co.
cites three major areas of improvement:
- The low rate of inflation in the last five years.
- The second-longest expansion since World War II.
- The adding of 14 million jobs since 1979, with the U.S.
unemployment rate now seven percentage points lower than the average
of other industrial countries.
What have we done right? Morgan's answer is that, first of all,
the United States has had a consistency of policy, especially
compared with the 1970s, with its twists and turns in price and wage
controls and stop-go fiscal and monetary policies.
The first decisive break with the ``quick-fix'' approach, Morgan
says, came with the ``bold anti-inflation monetary policy of late
1979,'' when President Carter appointed Paul A. Volcker as chairman
of the Federal Reserve Board. Despite several mid-course
corrections, Morgan maintains that monetary policy has displayed a
``consistently resolute, anti-inflation approach.''
Tax policy, too, has been steadier in the 1980s, Morgan says.
Though there was zigzagging on corporate income taxation, the Reagan
administration stressed reduction of marginal tax rates, adding to
the economy's dynamism.
The second major factor contributing to the better American
performance, Morgan says, has been increased reliance on market
forces, giving the economy greater flexibility. It notes that the
trend toward less government interference began under President
Carter, with the beginning of deregulation of the airline and
trucking industries and the swing away from energy price controls,
policies that were carried further by Reagan.
But has U.S. fiscal and monetary policy really been all that
consistent? And are America's chronic financial and international
problems the consequence of Reagan policies?
An analysis by Data Resources Inc., the economic research
subsidiary of McGraw-Hill, finds that the American performance would
have been much stronger in the 1980s had it not been for dramatic tax
cuts and a defense buildup that were not offset by discipline in the
budget. It also says the performance would have been better had
monetary policy not been so conservative, ``always erring on the
side of greater progress against inflation at the expense of higher
Using runs of its large-scale econometric model to compare what
actually happened with what the model indicates would have happened
if the 1976 tax code had been left intact and federal expenditures
had expanded only at the same long-term pace as the economy, DRI
found that interest rates would have been far lower in the last four
years and the budget and trade deficits would have been smaller. …