Overall, U.S. Compares Favorably

The holiday season is a time to give thanks for our blessings, to share our good fortune with the less fortunate and to resolve to do better in the year ahead. Most Americans have much cause to give thanks. Their standard of living is high by world standards and is rising.

Inflation remains low by recent U.S. historical experience. Our unemployment rate of about 7% is still a little high by our own historical standards but substantially better than those of virtually all major economies except Japan. Indeed, the unemployment rate in the United States looks good when compared to Western Europe, whose unemployment rate remains over 10%. Much of our unemployment is of relatively short duration, while most of that in Western Europe is entrenched, long-term unemployment.

Even more impressively, the U.S. economy has generated 28 million new jobs for Americans (including the baby-boomers as they moved into the labor force and jobs for many second earners in families) since 1970, while the European employment rate has hardly increased at all. This expansion in employment occurred over a span of time in which our economic policies have varied markedly and administrations have come and gone.

We are about to enter the fifth year of recovery since the 1981-82 recession. That recession was a byproduct of the successful disinflation of our economy from double-digit levels to a rate of about 3%. While inflation may be a future problem, it has long since receded from the headlines.

How Allies Stack Up

In the four years since the trough of the recession, the cumulative growth in real gross national product in the United States has been twice that in West Germany, three times that in Italy, four times that of France and half again as large as that in the United Kingdom. Only the Canadians, whose economy is closely tied to the United States, and the Japanese have done as well. This reverses the pattern of the 1970s, when the U.S. economy was out-performed by many other advanced economies.

When one turns to the Communist countries, the comparison is even more remarkable. Last year was the 20th anniversary of the year by which Nikita S. Khrushchev promised that the Soviet Union’s standard of living would surpass that of the United States. Not only did the Soviets not overtake us by 1965, but by 1985 the Soviet standard of living relative to the United States’ had deteriorated markedly. Our per-capita income is more than twice that of the Soviets.

The same poor performance is true in most of the Communist world. The Communist country with the best recent performance--Hungary--not surprisingly is the one that has adopted the most liberal market-oriented policies. China is now considering major market-oriented economic reforms.

While most Americans have much to give thanks for--our freedom and economic progress--some have been left behind. After a long upward trend, the poverty rate has started down again, but it is still 14%, about one in seven Americans. More than half the children living in a family with a single parent are poor.

Although the recovery from the recession has been sustained, relative to most postwar recoveries, some sectors, industries and regions have fared poorly. Firms and their workers that compete with imports or produce exports were substantially harmed by the long period of the overvalued dollar. Continued pressure from foreign competition--although ultimately a spur to our own economic performance--has caused some unemployment and dislocation. Our trade deficit, running $150 billion a year, has finally started to inch down slowly after a 30% fall in the value of the dollar.

We await some substantial economic growth in other nations so that they will demand more of our products, above and beyond the incentives they have because of the dollar’s fall in value making our products cheaper to them.

Troubled Areas

The oil industry, real estate, farming and many financial institutions are in deep trouble. Market forces will eventually restore some balance to these industries, but some substantial suffering has occurred. Fortunately, our social safety net--while far from perfect--has prevented the most extreme hardship for many of these workers and their families.

In addition to Western Europe and the Communist countries, most of the economies of Third World countries have fared poorly in the 1980s, too. In some Latin American countries, inflation still runs in triple digits; many have suffered drastic declines in real GNP, proportionally as large as the decline in the United States during the Great Depression of the 1930s.

While things look rosy in the United States compared to the rest of the world, we have serious problems, as well. Our trade and fiscal deficit dilemmas remain major problems. Despite the Gramm-Rudman-Hollings balanced budget law, the first year and half of its enforcement has been disappointing. Few program cuts have occurred, and spending targets have been “met” with accounting gimmicks.

Hard choices remain if we are to move toward reduced deficits. Which programs do we cut, and how much? Is this enough, or will we have to “enhance” revenue? If so, how? No consensus on these issues exists. Congress wants to continue the halt to President Reagan’s defense buildup and limit domestic spending cuts; it also appears willing to support a tax increase, but only if the President calls for it. That is the last thing the President is prepared to do, and he continues to insist on a defense buildup and further cuts in domestic spending while leaving the bulk of domestic spending--Social Security--off limits.

Most likely, some minor spending cuts and revenue enhancements will occur in the next couple of years. My guess, however, is that the most likely outcome is postponement of the date for achieving a balanced budget as the political process continues stalemated.

If we do not reduce our budget deficit substantially, it is unlikely that our trade deficit will shrink appreciably. Some improvement will occur because of the fall in the value of the dollar, but our trade deficit is really the result of an imbalance between domestic saving and investment in the United States. That imbalance reflects the low private saving rate and immense federal government borrowing, which means we must finance our investment with huge amounts of foreign capital. The more than $100 billion per year flow of foreign capital into the United States is the difference between the saving we generate domestically and what we invest.

Since our rate of investment is certainly not too high, redressing this imbalance must come on the saving side. Any large change is more likely to come from reduced government borrowing than from a huge increase in private saving.

Thus, as we give thanks for our good fortune, especially in comparison to the rest of the world, we must resolve to get our fiscal mess in order. Only then will our huge trade deficit and the threat of protectionist legislation and trade wars, which would throw the world into another recession, be eliminated.