JAMES GALBRAITH The Art of the Low-Ball? The Clinton administration has issued its 1997 economic forecast If the projections are righ4 the next two years will see a miserable two percent economic , growth rate in each. Unemployment is expected to rise slightly. This means no more gains in real wages, no more improvement in living standards. The expansion isnY over. But if this forecast is righ4 it isn’t going to do working Americans any more good 0 ne cannot, I suppose, blame Clinton for taking a bleak view. His administration doesn’t control the economy. It doesn’t even control the people who make the policies that do. Alan Greenspan operates on his own, and Clinton long ago adopted a policy of supporting whatever Greenspan decides. Better under such conditions to assume the worst from the beginning. Budget politics also dictated pessimism. Had the forecast been more optimistic, Clinton would have had a faster, easier route to budget balance. The budget, accordingly, could have been less restrictive than it is. There might have been a larger investment program, more human services and even more generous tax cuts, and still a path to balance by 2002. The catch is, Clinton would then have had to propose a more ambitious policy package. That would have set up political failure, on two grounds. First, Republicans would have screamed blue murder about the forecast, claiming it was a liberal gimmick to justify an easy budget. Second, they would have beaten the proposals, as they have the votes to do. The politics of the balanced budget amendment probably also played a role. With Clinton now declared in opposition to this mischief, opponents have a fighting chance of beating it in Congress. But to do so, they have to concede the case for a balanced budget, and then argue that we can get there without amending the Constitution. A rosy scenario would have damaged that political argument, for no clear gain. In the upshot, both parties are now hopelessly committed to actually achieving budget balance by 2002. No serious economist thinks there is any magic to this, but I can see why politicians feel differently. If they succeed, perhaps they hope to find budding surpluses in the federal accounts within a few years. That would finally enable them to start handing out tax cuts once again, or even, to think about new spending programs. Until then, everyone who thinks this way, Democrat and Republican, must sit tight, keep quiet, think smalland hope that nothing goes wrong. Unfortunately, two things are quite likely to go wrong. The first is a recession TWO THINGS ARE QUITE LIKELY TO GO WRONG. THE FIRST IS A RECESSION AND THE SECOND IS A RISE IN INTER-EST RATES. EITHER COULD BLOW THE BUDGET TO BITS. and the second is a rise in interest rates. Either could blow the budget to bits. The most serious recession threat comes from the tight budget policy of budget balancers themselves. The Administration foresees no economic downturn at any time between now and 2002. But no recession has ever been put in an official forecast. An uninterrupted expansion from 1991 through 2002 would be longer than any on record. It could happen, but it isn’t very likely. Rising interest rates are the second big budget risk. Secretary Rubin testified last week that a balanced budget would keep rates low, but he knows this isn’t so. The Federal Reserve controls rates, and forces behind the Fed continue to itch for a rate hike. The reasons are not mysterious: higher interest rates produce higher profits for bankers, while turmoil in the bond market produces profits for traders. So we are always hearing from these quarters about phantom inflation threats, wage pressures, stock market bubbles, and other nonsensical excuses for raising interest rates. Lately, the Federal Reserve has been ignoring the higher-interest lobby. That’s been good, but it could change. Two of the better economists on the Federal Reserve Boardthe conservative Lawrence Lindsey and the moderate Janet Yellen, have departed, leaving two vacancies to fill. We hear calls to replace them with bankersas if banking interests didn’t already effectively control twelve of the nineteen seats on the Federal Reserve’s policymaking Open Market Committee. If Clinton bows to such pressures, he may be rewarded with rising rates, a slowing economy, and the path to budget balance could be wrecked. Can this economy be saved from the low-ball forecasters and growth-slowing budget balancers? Lower interest rates, if he could get them, are Clinton’s best hope. Lower interest rates could buy a little recession insurance. They might produce a faster-than-expected growth rate and a stronger-than-expected budget. There is no technical reason why the economy cannot grow at three percent or betteras it did in 1994 and again last year. That would gradually reduce unemployment below five percent, most probably without raising inflation. That is the only way to give average Americans a little bit of improvement in living standards in the years just ahead, and it is surely the best way to approach budget balance without slashing Medicare or messing with Social Security. To have a chance of getting that much, Clinton needs to be very careful about who he puts on the Federal Reserve Board. More than anything else that the President actually controlswhich isn’t much these daysthose next two appointments could determine whether he gets through his term with an acceptable economy and with budget balance in reach. If he messes up, he might have to live with his own miserable economic forecast. Or worse. James K Galbraith teaches economics at the Lyndon B. Johnson School of Public Affairs, the University of Texas at Austin. 26 THE TEXAS OBSERVER FEBRUARY 28, 1997
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