NEWS ANALYSIS : Settling for Slow Growth Is Seen Selling Economy Short

Not so long ago, Americans took the growth of their economy for granted, like good health or a loyal friend.

Growth was the ultimate reward for U.S. know-how, a national birthright, the guarantee of a better future. It promised to be the cure-all for social tensions, meager pay raises, government shortfalls, empty cupboards, sagging morale, job losses.

It simply “hadn’t occurred to any of us that our rate of economic growth could slow down,” wrote Jeffrey Madrick in his sober new book, “The End of Affluence.”

Yet to a growing and diverse crowd of critics, U.S. policymakers have settled for a lackluster vision of growth in the 1990s, selling the economy short when it could be delivering more riches right now.

Many blame the Federal Reserve Board for tossing boulders in the work force’s already rocky path. Others, on the presidential campaign trail and in conservative GOP circles, hold out glittering promises that a flat tax or sweeping tax cuts somehow could spark a dramatic rebirth of 1960s-style growth.

Now President Clinton has joined those who wonder if the economy cannot be doing better. In unusual remarks Thursday, he called for a national debate on America’s growth pace and seemed to question whether the Federal Reserve is standing in the way of prosperity.

“Nobody but nobody knows for sure that this economy can’t grow any faster in the Information Age than it did between 1970 and 1995,” the president declared.

In fact, interviews with some of the nation’s leading thinkers on the subject suggest that the keys to greater long-term growth are hidden far from the Fed in new ideas and innovations, advances in technology, worker skills and investments that promote those goals. There is no magic formula, experts say, and the payoffs can take years.

“I think it’s pretty clear what the things are,” said Robert M. Solow, a Nobel laureate in economics at the Massachusetts Institute of Technology. But, he added with some regret, “the time span for anything to do with economic growth is so much longer than the time span that matters to politicians.”

For lengthy chapters of U.S. history, politicians did not need to worry about growth.

Growth in excess of 3% a year was commonplace from the Civil War into the 20th century. In the 1950s and 1960s, the economy galloped forward at more than 4% annually, compared with more recent rates of 2.5%.

The economy’s ebullient performance after World War II affected the nation’s very spirit. It created opportunities and boosted faith in the future amid rising anxieties about the Cold War and a nuclear threat.

“If you grew up in the 1950s [as I did], you were a daily witness to the marvels of affluence. . . . No problem seemed beyond our power to assault and conquer,” recalled Robert J. Samuelson in his new book, “The Good Life and Its Discontents.”

Then things changed. Gains in productivity plunged, dragging growth rates down to about 2.5% after inflation. In the current era, fears that a fast-growing United States would devour the world’s resources have been overtaken by today’s concerns of stagnant incomes and the gap between rich and poor.

The culprits seem to include a changing world economy, mismanaged economic policies and sudden increases in the price of oil. This much is clear, however: Even modest changes in growth have monumental effects over time.

If growth had remained a percentage point higher since the 1960s, the federal budget could have been in surplus by 1993, Madrick said. Annual household incomes could have been more than $5,000 higher. The nation would have had many billions extra for schools, roads and bridges.

“Like the clock that loses a second an hour, the American economy has lost ground so gradually over the past 20 years that we don’t realize how far behind we have fallen,” Madrick wrote.

Who is to blame? The Federal Reserve Board, which tries to squelch inflation with its interest-rate policies, is a convenient punching bag for fast-growth advocates.

The Federal Reserve, according to this view, is fighting the last war. Inflation is not the threat it used to be.

Business has become more adept at squeezing costs to survive in a competitive world economy, and consumers, insecure about their own jobs in an era of corporate downsizing and cost-slashing, pounce on bargains when they shop. The Fed’s fear that sustained growth beyond about 2.5% a year would unleash wage and price increases is out of date, according to this view.

“The pressure is everywhere to contain costs. All that is new, and the Fed hasn’t caught up with that reality,” contended Philip Braverman, chief economist at DKB Securities in New York.

In the new environment, or so goes the argument, the Federal Reserve should concentrate on policies that create jobs. To be sure, the Fed has ratcheted short-term interest rates down in recent months, but that still does not offset the series of increases it engineered in 1994.

Growth might prove particularly helpful for unemployed or underemployed workers who have yet to enjoy the benefits of the current economic expansion. And if bosses viewed each employee as a scarce and valuable commodity, that might add a modicum of job security to the increasingly insecure workplace.

At a fund-raiser in New York on Thursday, Clinton suggested that it is time for the Fed to reconsider all these matters. The president was particularly disturbed that Republicans in Congress refused to consider Felix G. Rohatyn, a pro-growth investment banker from New York, for a seat on the influential board.

“One clear area where we ought to debate is whether the conventional wisdom of about how fast this economy can grow is right,” Clinton said.

Placing Rohatyn on the Fed would have encouraged fresh thinking about growth, he said, “But the politics of Washington said: ‘No, we insist on the conventional wisdom, we insist on holding people down, we don’t even think it’s worth debating. Over and out.’ ”

If the Federal Reserve gets much of the heat, experts generally agree that the true path to higher living standards is through greater productivity: more goods and services generated by each worker.

Unfortunately, nobody knows exactly how to get there, and Fed interest-rate policies affect only the short term. Better-educated workers would help, it is agreed. Also, more national savings and investment could pay for a lot of new technology and training in how to use it.

No one, however, can say precisely how it all adds up. “Our ignorance is higher than a lot of people are willing to admit,” said Paul M. Romer, an influential thinker on growth at UC Berkeley.

He labels three factors that seem to drive growth over the long haul:

* “Software”: ideas that can be used over and over, such as the principles of mass production.

* “Hardware”: machines and facilities.

* “Wetware”: the people who use them.

Breakthroughs and insights that no one has even dreamed of ultimately may remake the entire picture. In the past, for instance, the establishment of a patent system and the opening of private research universities led to greater affluence. Sometimes government policy actually played a vital role, as with the creation of agricultural research stations.

“What was essential was a whole collection of discoveries about ways to organize the world and take advantage of the world,” Romer said.

Said Gavin Wright, an economic historian at Stanford University who recently co-edited a book on growth: “There’s a growing body of thought that you really can influence the growth rate.” But the gains are not likely to be staggering, he added. “We’re talking about changes in tenths of a percentage point.”

The Clinton administration has endorsed what it calls “a constellation of policies” to foster growth over the long haul. These include balancing the budget, supporting efforts at training and education, sponsoring research and encouraging exports.

The administration’s newest forecast is for growth of 2.2% to 2.3% for the next few years. The full payoff for today’s growth policies is not expected for years, and officials do not pretend to be able to measure it.

“I wish I could pull a number out of the hat and say we’re going to double the growth rate,” said Joseph E. Stiglitz, chairman of the White House Council of Economic Advisors. “The fact is that trying to make inferences [about growth trends] is very difficult.”

MIT’s Solow complained that politicians on the stump often talk about growth in a “phony” way, as if government had some direct control of it. Instead, he said, leaders must tackle such difficult questions as how to create effective tax incentives for business investment without saddling average Americans with the cost.

Yet if there is an element of opportunism in some of today’s political rhetoric, Solow agreed that growth is on people’s minds for legitimate reasons.

“People feel insecure about the future. Who knows if jobs will last? Who knows if wages will rise? Those are real reasons to talk about the issues of growth.”