Seizing the Economic Opportunity: Beware Candidates Promising Everything

The fantastic performance of the U.S. economy challenges Americans to use their new opportunities well. The election of 2000 is a chance for voters to hear how candidates propose to make the most of the good fortune that has befallen us. All candidates, whether for the presidency or for Congress, will try to convince voters that their political party is responsible for the economy's success and best able to ensure its continuation. All will have proposals for using the additional resources that high growth makes available.

That the economy is doing astonishingly well is beyond dispute. Total output has been growing continuously for longer than at any time in our history. Unemployment is at a 30-year low. Productivity growth has accelerated. Incomes are rising. Inflation has been quiescent. The federal budget, along with most other government budgets, is in substantial surplus.

To be sure, some clouds darken the sunshine. Prosperity has left behind some groups, especially the unskilled and less educated. Moreover, the high-flying stock market, the rapid accumulation of private-sector debt, and the growing obligations of Americans to foreign investors make for some nervousness about the long-run sustainability of the good economic news. But recent economic performance and near-term prospects are undeniably positive. In contrast to many previous elections, such as 1992, the national mood is decidedly upbeat, and for good reasons.

There is more room for argument about who gets the credit, and plenty of opportunity for all candidates to claim some of it. The initial credit, of course, goes to the private sector, whose energy and resilience have been remarkable. The most gratifying surprise has been the recent acceleration of productivity growth. In the past three years, the average growth in output per hour worked has returned to the rates that propelled rapidly rising standards of living from the end of World War II until productivity slowed mysteriously in the early 1970s. The recent productivity surge has allowed firms to absorb wage increases, even an oil shock, without raising prices much or losing profitability. The boost in productivity is undoubtedly related to high investment in the 1990s, the maturing of the computer and telecommunications revolutions, the shortage of skilled workers in tight labor markets, and intense competition at home and overseas, but no one is quite sure why productivity is accelerating right now or how long the speed-up will last.

The private sector's great run didn't happen in a policy vacuum. It is at least partly a reflection of responsible fiscal, monetary, trade, and regulatory policies for which both political parties can rightly claim part of the credit. Moving the federal budget from huge ongoing deficits to substantial surplus has put downward pressure on interest rates, fostered investment, and made it easier for the Federal Reserve to keep the economy from overheating. Serious deficit reduction was kicked off by the agreement between President Bush and the Democratic Congress in 1990 and dramatically pushed ahead by the first Clinton budget in 1993, for which no Republicans voted. The budget agreement of 1997, produced after protracted wrangling between the Republican Congress and President Clinton, completed the job of shoving the budget into surplus for the first time in three decades. Look for all candidates to crow a bit over the surplus and emphasize their own or their party's role in achieving it.

Monetary policy deserves some kudos, too. The Federal Reserve's interest rate increases in 1994 kept the economy from overheating and arguably allowed growth to keep going until the stars that brought the productivity surge were aligned. The rate reductions of late 1998 stabilized world markets and helped avoid another round of international financial chaos that could have destabilized the United States along with our trading partners. Most candidates will not mention the Fed's role, however, because they cannot claim credit for it and cannot influence it directly, even if they win. Moreover, the president, with the enthusiastic support of the Senate, wisely forestalled any attempts to make the leadership of the Fed an election issue by reappointing Alan Greenspan to another four-year term as chairman.

The resilience and competitiveness of the economy also owe something to the gradual deregulation of important sectors—airlines, trucking, telecommunications—over the past couple of decades. Lowering trade barriers helped, too. Members of both parties worked hard to hammer out the complex details of regulatory reform and trade agreements, often over vocal opposition. The president gets credit for bucking strong forces in his own party to fight for NAFTA and the Republicans for helping him pass it. Plenty of workers still feel injured by foreign competition, but the good economy has diffused some of their anger, so trade is unlikely to be a big issue in the campaign.

Candidates ought to focus on what they will do to keep the productivity surge going and open opportunities for all to participate in its benefits. One obvious answer is: reform the schools and improve access to higher education and skill training for workers at all levels, present and future. Education and training will get a lot of air time in the campaign and rightly so. Unfortunately, successful national candidates will find after they get to Washington that they cannot do much to affect local schools. Their biggest opportunity for improving elementary and secondary education comes in getting citizens focused on its importance. Citizens who want better schools can do more to bring about change where they live than the president and Congress can do from Washington.

What the candidates can affect if they win is the federal budget, especially the use of the surplus. From the point of view of sustaining the high-growth economy, the best thing to do with the surplus is nothing at all—just use it to pay back the federal debt held by the public. That will lower interest rates and foster growth-producing investment.

The worst thing to do with the surplus is to use it for a big general tax cut. A tax cut would stimulate more consumer spending in an economy already threatening to overheat and force the Fed to raise interest rates. Even if the impact of the tax cut is delayed, the problem is the same. A major tax cut will shift the mix of policies toward looser fiscal policy and tighter monetary policy. That is bad for long-run growth.

Candidates will use 10-year forecasts of the surplus to make it look as though so much money is available that they can promise to do everything—cut taxes, fund new programs, and reduce the debt all at the same time. The 10-year aggregates are indeed large—the Congressional Budget Office projects more than $4 trillion in total surplus if the economy keeps growing steadily. The economic growth rate that CBO assumes (about 2.7 percent a year) is not especially optimistic, but voters should look at the other assumptions skeptically. More than $2 trillion of the 10-year surplus will accumulate in the Social Security trust fund. That part of the surplus is real, but it is not big enough to assure payment of Social Security benefits to future beneficiaries at currently promised rates. The Social Security surplus not only should not be touched, it ought to be increased.

The other $2 billion of projected non—Social Security surplus is mostly a mirage, because it assumes cuts in current spending for most government programs, or unrealistic future freezes in spending, that are simply not going to happen. Voters do not want them to happen, and the candidates know it.

Surpluses based on more realistic assumptions are much smaller; indeed only about $150 billion in the first five years. These would be more than eaten by proposals that appear to have bipartisan support—partial coverage of prescription drugs under Medicare, increased defense spending, and adjustment of the marriage penalty on the income tax, to name only three.

The extraordinary performance of the U.S. economy gives Americans a huge opportunity to invest in the future, especially to reduce the federal debt to increase the probability of sustaining the high growth for a long time. Voters will hear a lot of candidates promise that they can do that and, at the same time, deliver major tax cuts and major increases in public spending. They can't. Voters should take heed.