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Americans need to focus on long-term growth.

All of us know that 1991 was a tough year for the U.S. economy. Even though the recession was mild by historical standards and some economic signs suggest that recovery has been moving slowly for some time, many businesses, consumers and lawmakers seem unwilling to believe this. Many people, especially after the Gulf War, had high expectations for a strong recovery based on memories of rebounds in the early 1980s and the 1970s. Unfortunately, the U.S. economy will not be able to return to the more rapid growth to which we have become accustomed, at least for the foreseeable future.

In 1992, I look for the economy to grow at a moderate pace of around 2 percent. Because employment lags behind GNP and many businesses are consolidating, I think the jobless rate will remain pretty much unchanged. Price pressures look more moderate than they have in some time, and the consumer price index (CPI) should increase 3 percent or a bit more as an annual average for the year.

I am not going to dwell on the reasons we are undergoing a transition from rapid growth to slower growth. Rather, I want to concentrate on the need for Americans to change their attitudes about growth in a fundamental way. I am not just talking about adjusting our expectations to less rapid growth but, more basically, about learning to stop supporting schemes that spur growth only in the short term. Instead, as a society, we must learn to evaluate alternative patterns of growth in terms of their ability to sustain expansion over the long term.

There is growing sense of urgency that something be done to quicken the pace of growth or to "jump start" the economy. The danger is, of course, that policymakers will be pressured into a "quick fix"--one that will spur the economy for a year or two only to create new imbalances tha will have to be corrected through yet another transition similar to the ones banking, real estate and many service industries have been painfully undergoing.

Why is it that Americans are so impatient in this recovery when the last recession was so much more severe in terms of the contraction in GNP and the toll on employment? You may recall that the jobless rate was 10.8 percent in November 1982, compared with 7.1 percent at the end of 1991. Moreover, the unemployment rate remained high well into the '80s expansion.

As I see it, the main reason for the current disappointment is that many people have confused cyclical economic problems with imbalances that require more basic, longer-term adjustments, including consolidation in much of the service sector and paying off excessive debt--incurred by consumers, businesses and the government. The disappointed also ignore fundamental demographic changes that alter demand for many products in a profound way. Having confused the problems, they seek the wrong solutions.

Much of the current slow pace of the recovery arises from the complex transition businesses and households are being forced to make as a result of past decisions that engendered short-term, unsustainable growth through debt expansion during the 1980s. Fiscal policy, for example, produced unsustainably fast growth in several ways: a large defense buildup, tax policies that encouraged excessive real estate development and, more generally, the ongoing stimulus of large federal budget deficits.

Although there was much talk about investment-led growth and there was a lot of capital spending in real estate, the nation neglected other important kinds of investment, more public in nature, that are equally important. There were many initiatives in education, for example, but our society lacked the staying power to see them through. We are how seeing alarming cuts in educational expenditures, affecting the very basics of the curricula in some states. Likewise, we failed to come to terms with health care, another primary form of humand capital investment, instead transferring this issue largely to the private sector.

Throughout the '80s, rather plan investing, we consumed more than we produced and went into debt. Now we must service that debt, much of which is owed to foreigners because, as a nation, we lacked the domestic savings to meet all our demand for financing. To support this debt, we are exporting a large share of our output; that is, what we are sending abroad for others to use is growing faster than the growth in what we are consuming domestically. We are producing more, but enjoying less.

This important insight, I believe, goes to the heart of the current malaise regarding the economy. Economic statistics like GNP reflect only what we produce, not what economists call "welfare," that is, our sense of well-being. In the past, growth in output was generally translated into growth in domestic consumption and therefore in domestic well-being, but that is not happening now because of the debt-service burden. This burden is also limiting our ability to add capital for growth at the same time that slower population growth is limiting out ability to add workers.

If we are to increase our economic welfare, we must cultivate some patience with cyclical policy measures. However, we must be careful not to squander the hard-won gains against inflation by pushing the economy onto a growth path that can't be sustained.

In addition, as Americans look for policy measures that promote growth, we must be careful to select those that do not just yield a payoff in the next year or two but rather measures that foster sustainable growth. We must start making difficult choices about devoting resources to solve problems that in the past we tried to solve largely through growth itself. For example, we must begin to deal directly with difficult socioeconomic issues such as affordable housing, health care and education. We simply have not addressed these issues on the societal level but instead have relied on growth itself to make the problems go away. Many problems--poverty, for one--persisted despite the rapid growth of the 1980s.

To get tough with ourselves, we must be willing to reorder our priorities, realizing that whatever we target for investment--be it education, health or infrastructure--will not yield as quick a pay-off as building another high-rise office building did in the '80s. Yet we can be secure in the knowledge that we will have improed out nation's prospects for the future.

The kind of transition in thinking that Americans--including business executives, consumers, taxpayers, voters and lawmakers--must undertake is not easy. Nor is it easy for those who are unemployed or facing difficult business problems to be patient and work through the current transition, allowing the policy medicine that already has been administered to work its way into the national bloodstream. Nonetheless, I hope that we can transmute this time of questioning into a serious discussion of our long-term goals and how we should achieve them.

It is becoming more critical every day that we Americans change our expectations to bring them more in line with a mature economy that may grow more slowly--yet steadily--over time. I believe we have the sense to know that something must change. I only hope that we will also have the will to encourage our elected leaders and policymakers to translate our desires into economic policies truly in line with the needs of the future.

Robert P. Forrestal is president and CEO of the Federal Reserve Bank of Atlanta. A version of this opinion appeared in the January/March 1992 issue of the bank's Economics Update.
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Author:Forrestal, Robert P.
Publication:State Legislatures
Date:Jul 1, 1992
Words:1245
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