The Washington Post, Tuesday, September 1, 1998; Page A19
As the stock market hits the skids, Russia descends into the maelstrom and a worldwide slowdown looms, it has become glaringly obvious that the U.S. economy will be the big presidential election issue of the year 2000—and perhaps even of the congressional elections nine weeks from today.
Voters, half of whom own stocks, could soon be looking urgently for a recipe for revival. But the political parties—obsessed with the Lewinsky scandal and otherwise happy to stay out of sight until Nov. 3—aren't suggesting answers. Nor are the putative presidential candidates—with one surprising exception, Sen. John Ashcroft, Missouri Republican.
Ashcroft at first positioned himself as the candidate of the religious right, but he now stands as a sensible advocate of free-market, pro-growth economics. I'll get to his ideas below, but first let's look at the signs of deterioration. They're mounting. . . .
The stock market itself—a good predictor of recessions—dropped 5.7 percent last week, the worst weekly performance since October 1989 (a recession began the next year). It fell 513 points yesterday—another 6.4 percent—on the heels of announcements that a key index of regional manufacturing had plummeted and that new-home sales had dropped.
Interest rates on long-term Treasury bonds have sunk to record lows—a sign that investors here and abroad are fleeing to safety in U.S. government securities rather than using their money for more productive (but risky) investments.
Meanwhile, deflation—a decline in the general level of prices—is sweeping westward from Asia. Gold hit $273.40 an ounce on Friday, lowest in 19 years. The Commodity Research Bureau's price index last week fell to a 21-year low.
Lower prices are usually a boon to consumers, but if prices fall too far, commodity-based economies swiftly decline. That's what has happened to Russia and to oil-producing Venezuela, and hard times threaten Mexico and Canada, two of our three biggest trading partners (the other being Japan, sick with its own troubles).
Asian nations, suffering from over-production, are sending their goods to the United States at low prices. That forces U.S. companies to lower their own prices, and, unless those firms can cut costs as well, their profits will decline or vanish. It's already happening.
The U.S. economy is remarkably resilient, and sometimes markets get it wrong. The Dow fell 23 percent in a single day in 1987, but a recession didn't occur for another three years. Also, there is often a considerable lag between the time an economy starts faltering and the time most people feel it.
Still, I would say the odds are about even that, within a year, the United States will be suffering from a significant slowdown, and, sooner than that, voters will know that there's trouble in economic paradise.
The most important step right now is for the Federal Reserve to cut interest rates. That would pump more liquidity (i.e., money) into the system, encouraging businesses to borrow and consumers to spend. It would also weaken the dollar, thus helping the currencies of countries in dire economic straits.
But even if the reasons for a decline are cyclical, distant or beyond the control of Congress and the White House, a faltering economy demands a political response. President Clinton, who received much of the credit for prosperity, will take much of the blame for its opposite—but only if politicians on both the right and the left can point to faulty policies and, better yet, offer solutions.
So far, only Ashcroft has done this in a comprehensive way. He recently published a 45-page pamphlet titled "A New Beginning: An Economic Plan for the Next American Century." Here are the high points:
Tax reform, featuring a modified version of a flat tax, with rates of 10 percent for families making up to $68,400 and 25 percent of those making more.
A spending cut of $1 trillion over five years (trimming the federal budget by roughly 10 percent), achieved through the government-wide equivalent of a base-closing commission plus an end to corporate welfare.
Repayment of the federal debt over 30 years, while at the same time shoring up the Social Security trust fund.
"Unleashing the information economy," by halting taxes on the Internet and doing a better job of protecting intellectual property rights.
Ashcroft believes that, by freeing Americans to save more and produce more, we can prosper and meet our obligations at home and abroad. He's right, but his plan—unlike a Fed rate cut—clearly won't stop a decline that has already started.
Still, even if they can't affect the downward course of the economy, both parties now have to take a stand by proposing policies that are long term, pro-growth and anti-protectionist. We have to demonstrate to other nations that the United States prospers through an open, unfettered economy built on the rule of law. So can they.
We all may suffer in the next few years, but as with every downturn in the past, we will emerge stronger. Now is the time for serious politicians to do the right thing: to stop bleating about Monica and tell us how to shape an economy to make the world's citizens safer, freer and happier.