Will the real economy please stand up?
By Dennis Rice
As the Dow Jones hovers around the psychologically significant level of 10 000, the image of moths circling a flame comes to mind. When my wife and I visited Las Vegas a few weeks ago, the sight of a copy of the Eiffel Tower soaring above the Nevada desert seemed more than just out of place; it left the impression that perhaps something is not quite right with the American economy. With that nation's economy in its ninth year of unbroken expansion, many have come to wonder just how long the present prosperity can last. To answer that question, it is essential to examine and contrast the kind of economic growth we have had in the past with what we are experiencing today.
The economic recovery that occurred in the 1980's looks positively anemic compared to the growth we've experienced lately, but if we look at the underlying fundamentals we can observe that the recovery had a very rational foundation. It was rooted in the belief that the only true path to prosperity is freedom -- freedom from government interference. This means the freedom to embrace new methods of production and technology which increase the division of labour. As labour and capital become more efficient, we heighten the purchasing power of our currency and our standard of living.
This genuine prosperity had part of its roots in the Carter administration's deregulation of airlines and the transportation sector. This was part and parcel of a developing belief that the economy had suffered greatly under a burden of regulation in the 60's and 70's and that it was time to change course. Ronald Reagan built on this legacy in his first term with a program of tax cuts, further deregulation, and the restraint of anti-trust suits. Fueled by this newfound freedom, the stock market awoke from its bearish slumber and began to move upward, gradually taking the economy with it. The computer revolution took off in this period, resulting in tremendous increases in productivity that we still benefit from to this day.
Despite such progress, however, a different type of economy began to take hold towards the end of the eighties, steadily and relentlessly eroding earlier gains. America began to reverse course in Ronald Reagan's second term, when the effects of his previous tax cuts were more than canceled out by tax increases. When the stock market stumbled in 1987, it was not just a bump in the road, as many pundits would like to believe. Markets are an essential economic barometer, and the stock market was sending a clear message: it did not like the return to higher taxes and more intrusive government that Washington seemed focused on.
The market's complaint, however, was ignored. George Bush followed Reagan with even more tax increases in his term in office. Not only that, the whole character of the administration began to look markedly different from its predecessor. The Americans with Disabilities Act was passed, bringing with it the disturbing spectacle of non-objective law. Vaguely written, allegedly to increase its "flexibility", the ADA has since proven to be another bonanza for trial lawyers. Businessmen, by contrast, face the prospect of being sued under a poorly understood, totally unpredictable set of laws. No one can know for sure if they have broken those laws until a judge decides so. To add to the chaos, the Bush administration also jumped wholeheartedly onto the environmentalist bandwagon, passing initiatives which basically aimed at confiscating private property without compensation. By then, the economy had sunk into recession, sending another message that the marketplace didn't care for such regulations. Those who followed Bush not only ignored this message but have taken steps to prevent the market from making such embarrassing statements in the future.
Bill Clinton's victory cemented the post-Reagan liberal agenda. Its basic premise is to present the appearance of being in favour of freedom while smuggling regulation in through the back door, allegedly to improve "defects" in the free market. Thanks to that premise, tobacco companies and gun manufacturers face increasingly vicious lawsuits egged on by the Clinton administration. Who will be the next target is anyone's guess. The result has been the equivalent of huge tax increases, made possible not by an act of Congress but by the arbitrary demands of a liberal judiciary. In marked contrast to the early eighties, the Department of Justice has stepped up its harassment of business through the use of anti-trust suits. Bill Gates is only the most famous of the victims, but by no means is he the only one or the last. Once again, trial lawyers and the judiciary are being given substantial license to determine the course of economic planning, with devastating consequences.
Clinton's knack for dressing up his commitment to collectivism with conservative-sounding rhetoric actually makes him far worse than an outright socialist. If he would openly declare his hostility towards business, at least there would be no mistaking his intentions. But most citizens are reluctant to condemn Clinton since he appears to be responsible for an economic boom that is keeping unemployment at record low levels. Increasing levels of taxation and regulation should have short-circuited that boom by now, but one key plank in the Clinton agenda has largely prevented that: explosive growth in the money supply courtesy of the Federal Reserve.
Alan Greenspan has been particularly accommodating to his bosses, gunning the money supply whenever the economy starts to choke. This credit expansion provides a seemingly painless means to anesthetize the economy from the hardships inflicted on it. As long as credit is cheap, President Clinton can appear to have the best of two contradictory worlds: business seems to rebound from almost any blow while central planners can carry out their depredations on the productive with impunity. Of course, there is the added bonus of soaring tax receipts which provide the illusion of budget surpluses while spending, in fact, continually increases. Under other economic circumstances, this kind of credit expansion would have shown up in increased inflation.
Fortunately for Clinton, currency devaluations in Asia and elsewhere have provided a flood of cheap imports into the U.S. which have assisted greatly in keeping consumer prices down. This has truly been a happy coincidence for the Clinton administration.
Perhaps the worst effect of the "goldilocks" economy is that is has convinced far too many people that the welfare state can be made to work after all with just the right "mix" of freedom and controls. It has created an attitude that says, in effect, so what if we harass productive members of our economy; we can literally just paper any resultant cracks in our economic structure. This is why I maintain that the present boom has little rational foundation and consequently cannot last. What events will finally collapse it are difficult to predict; perhaps the U.S. dollar will no longer be able to command its present value, increase protectionism may distort worldwide trade patterns, or more derivatives schemes will find themselves on the wrong side of a currency shift.
Whatever the case, the result will be an economy whose mal-investments (perhaps Vegas' Eiffel Tower will be one of them) will suddenly become glaringly obvious. If we don't shortly re-examine the Clinton administration's propensity to tax, spend, regulate and then print money to pay for it all, we could find ourselves spending much of the next decade simply cleaning up the wreckage.
That's too high a price to pay for an illusion.
Dennis Rice is a writer who lives near Winnipeg, Canada
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