How to Get Out of the Economic Rut

The Share Economy: Conquering Stagflation

by Martin L. Weitzman
Harvard University Press, 167 pp., $15.00

The Second Industrial Divide: Possibilities for Prosperity

by Michael J. Piore and Charles F. Sabel
Basic Books, 355 pp., $21.95

In 1983 and 1984 the United States was in the midst of a cyclical recovery that was being sold to the public as if it were permanent prosperity. While the selling job was successful, the “stable expansion” promised by the administration looks more and more like a mirage. Almost as President Reagan’s election tide rolled in, a tide of the bad economic news rolled out.

Just after the election Budget Director Stockman opened his books and revealed that the budget deficits were going to be much larger than was previously supposed. The Commerce Department revised real economic growth estimates downward to a 1.9 percent rate in the third quarter. If growth were to take place at such a pace through 1985, the budget deficits would be even larger than the new higher deficits being forecast by Mr. Stockman. With such a growth rate little further decline in unemployment could be expected. While 7 to 7.5 percent unemployment is better than the almost 11 percent of 1982, it is a dismal rate if one remembers that such rates were seen only in the depths of a recession. What used to be our worst unemployment rates are now our best unemployment rates.

Growth slowed in the third quarter of 1984 because American firms were not competitive on world markets. Two thirds of what Americans bought was produced abroad. Foreign sales to the US actually rose at a 5.7 percent rate. If America had been running a balance in its balance of trade, instead of a $130 billion deficit, three million Americans would be working who are not working in 1984. Those three million extra jobs would have brought the US a long way back toward a more reasonable level of unemployment.

While an inflation rate that seems to have stabilized around 4 percent looks good in relation to the recent past, it is also dismal viewed from a somewhat longer perspective. Such rates in the late 1960s produced demands for wage and price controls to end what was then viewed as an intolerable rate of inflation. Such rates are now the best that the economy can achieve right after it has been put through the wringer of almost 11 percent unemployment and four years of no growth from the first of 1979 through the fourth quarter of 1982. Historically, 4 percent is a very high jumping-off point from which to commence the next round of inflation.

Moreover the clouds of just such an inflationary shock are piling up. Funds must be borrowed from abroad to finance America’s trade deficit. At some point the lending stops. No country can forever borrow to finance a deficit in its balance of payments. No one knows when the end will come, but it will come. And when the lending stops, the dollar falls.

Econometricians estimate that the dollar would need to fall about 30 percent to restore balance to America’s balance of trade. But such a fall means that the price of imports measured in…

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