The Economy After Reagan

Ever since the end of the Great Depression, Americans have taken a rising standard of living as their birthright. Each successive generation has enjoyed more disposable income, more leisure time, a greater stock of material possessions and a wider array of government supports than its predecessors. In a way few Americans understand, the nation’s ability to maintain that record is threatened by disturbing factors in the world economy. Making the hard economic choices required to keep the United States growing and to permit all groups within the population to share in that prosperity is the fundamental challenge of the post-Reagan era.

In some ways, the accomplishments of the eight-year presidency of Ronald Reagan will support George Bush’s efforts to achieve continued economic growth. President Reagan presided over an economic restructuring that caused extreme pain to many Americans, eliminating millions of jobs and forcing the shutdown of thousands of companies. In the process, however, it left the nation with a more mobile workforce and a more modern industrial plant. Reagan’s attacks on government spending left Americans with reduced expectations of their government’s capabilities, easing the political pressure on his successor to offer expensive new government-funded programs to cure social ills. And due to the cautious policies of the Federal Reserve Board and the absence of unpleasant price shocks during his term, President Reagan is able to leave to his successor both an unusually low unemployment rate and a relatively low and stable rate of inflation, perhaps the most welcome gifts of all.

In other ways, however, President Reagan leaves an exceptionally troubled economic legacy. Much of the prosperity of the past six years, since the bottom of the recession in November 1982, is due to the federal government’s persistently spending more than it was taking in by a very wide margin. Budget deficits are nothing new, of course, but the deficits of the Reagan era are different from those of earlier years, both qualitatively and quantitatively. In qualitative terms, the federal government has been spending a greater share of its income on military programs, income transfer payments such as social security, and interest payments on bonds issued to finance the deficits incurred in previous years. This has left a smaller share to fund the investments, from education to airport construction, that are essential to future economic growth. In quantitative terms, the Reagan budget deficits have amounted to a far greater proportion of the nation’s total output than ever before in peacetime. They continue to command such a large share of the nation’s savings that the United States remains a major importer of capital, a situation which has led to an overvalued currency, a trade deficit so severe that it has greatly strengthened the forces of trade protectionism and relatively high inflation-adjusted interest rates that have worsened the debt problems of developing countries.

This situation endangers not only living standards, but also America’s customary role as the world’s dominant power, shaping the course of events in distant corners of the globe. The ability to project diplomatic influence as well as military force depends upon the country’s relative economic position in the world. "Economic strength," two recent secretaries of state have noted, "is . . . central to the way America is perceived by its friends and potential adversaries. U.S. political leadership in the world cannot be sustained if confidence in the American economy continues to be undermined by substantial trade and budget deficits."

In sum, due largely to U.S. domestic economic policies, the world economy remains seriously out of balance. Restoring that balance will be the most crucial task of the Bush Administration.

II

What will it take to restore economic health? The first, and most critical, order of business is to pursue serious reductions in the federal budget deficit. This cannot be done through massive, recessionary spending cuts in a single year, but only through a sustained program of budget reductions and tax increases over a four-year period. If this is to stand any chance of being politically acceptable, the pain of deficit-cutting will have to be spread equitably among the American people. Higher taxes will mean slower growth in household spending, but lower deficits should allow much lower interest rates, facilitating business expansion. This will gradually alter the division of the nation’s income, reducing the share devoted to consumption and raising that invested in productive facilities. If deficit reduction is combined with a less restrictive monetary policy in the United States and diminished reliance on export-driven growth abroad, it could set the stage for another period of sustained prosperity in the 1990s.

The 1988 budget deficit was approximately $155 billion. With no changes in legislation and assuming a continuation of current economic circumstances and no new spending programs, the deficit will be $148 billion in 1989, before tapering off by roughly $6 billion annually to $121 billion in 1993, according to the Congressional Budget Office. Government outlays in 1988 were 22.3 percent of GNP, while revenues stood at 19.4 percent. In 1993, under present conditions, these figures will be almost unchanged, at 21.9 percent for outlays and 19.4 percent for revenues.

Complicating the political debate over the budget is the growing surplus in the social security retirement and disability trust fund. The surplus was approximately $37 billion in 1988. It is expected to rise to $97 billion by 1993, and then rise further into the early years of the next century in order to cover the expected liabilities from the aging of the baby-boom generation. These surpluses are masking larger deficits in other areas. If the social security surplus were excluded, the federal deficit in 1988 would have been $192 billion, or 3.7 percent of GNP. In 1993, it would be as much as $218 billion, rather than the $121 billion officially estimated.

The budget deficit will not resolve itself in the absence of major fiscal policy changes. Claims to the contrary assume that the federal government will dip into the social security trust fund and apply it to current expenditures rather than reserving it to pay benefits in the second decade of the 21st century. Using social security funds in this way would be yet another example of fiscal indiscipline. Just as the children of the baby-boom generation will have to service the government debt accumulated in this decade to finance their parents’ consumption, they could find themselves obligated to finance their parents’ retirement because funds set aside for that purpose had been spent on other things.

While opposition to tax increases remains a potent political pledge, the evidence is clear that Americans are not willing to tolerate major cuts in the level of services they receive from the federal government. The public must be told the blunt truth: if they desire these programs and services, they must pay for them through higher taxes. In political terms, substantial increases in excise taxes on gasoline, tobacco and alcoholic beverages may be the most opportune way to begin, but they alone will not generate enough revenue to narrow the budget deficit significantly. Nor will raising taxes on the very rich. Unpalatable though it may be to open the federal income tax code once again, an increase of one or two percent in marginal personal income tax rates may be unavoidable. Or, alternatively, the indexing of personal income taxes could be postponed.

On the spending side, significant cuts are possible only in the two largest budget categories, entitlements and defense. In the entitlements area, restricting Medicare benefits to those with lower incomes is the easiest way to achieve major savings without eliminating the indexation that protects social security beneficiaries against inflation. On the defense side, the most important issue deals with fundamental military strategy. Almost all of America’s strategic plans are based on the assumption that military spending will remain in the area of six percent of the nation’s total output, as it has for most of the past thirty years. It may well prove impossible to maintain that level in the decade ahead, given the amount of taxes Americans are willing to pay. Yet reducing military spending under present circumstances is an endlessly frustrating task, because any reduction inevitably leaves the United States ill prepared to maintain a sound military posture under current strategic doctrines. There is a need to return to the beginning, develop new approaches to defense strategy based upon more modest budget assumptions—and then to seek a bipartisan congressional consensus that spending should remain at that lower level for the foreseeable future.

Whatever course he chooses to balance the budget, it is critical that President Bush act decisively to develop the package early on, and in close consultation with Congress. If budget deficits can be set upon a declining path, the trade deficit will shrink, the growth of debt can be slowed, and the cost of investment can be lowered. The sooner U.S. budget deficits are brought under control, the smaller the debt service requirements will be in the future, and the sooner America will again project an image as the world’s economic leader.

III

The second task for the new administration is to do all in its power to maintain an open world economy. Rising protectionism in the United States threatens seriously to erode America’s standard of living, while the growth of barriers to trade abroad will make it difficult for the United States to attain the trade surplus it will need to service its foreign debts in the 1990s. Protectionism also hinders the adjustment of international trade flows to changes in exchange rates, contributing to the pressure to abandon a market-based exchange rate system.

Keeping the economy open will require careful maneuvering abroad and at home. With the Uruguay Round of GATT (General Agreement on Tariffs and Trade) negotiations off to a shaky start, the next president must do more to bring the private sector and Congress into the process. He must mobilize private sector support and keep Congress constantly apprised of the negotiations. The new administration must continue to push hard for visible signs of progress, even when it becomes more difficult as foreign countries’ trade surpluses turn into deficits in order to allow the United States the trade surplus it will soon require. Unless a new multilateral accord resolves basic issues of disagreement, trade frictions with Japan and the European Community are likely to escalate in the decade ahead, particularly as Europe moves toward unification in 1992 or soon thereafter. Yet the United States should not succumb to pressures to resolve trade frustrations through numerous bilateral accords. The breakup of the world trading system into regional blocs, each based upon separate bilateral agreements, is directly contrary to the long-established U.S. goal of liberalizing the international flow of goods and services. By making it more difficult to import and export, such a breakup could have an adverse effect on living standards in the United States.

A major lesson of the past decade is that it is not enough for a president to negotiate freer trade with other countries. He must also attend to the domestic front on trade matters. President Bush must convince Congress and the public that he is according trade matters their due priority and is protecting American interests by dealing severely with trading partners who infringe upon the rules. The political structure for handling trade issues requires that the president take the lead in order to protect members of Congress from intense pressure to save local factories and mines from import competition. When the chief executive fails to assume the role of advocate and lightning rod on trade matters, as was the case throughout the Reagan years, the protectionist pressures are almost impossible for Congress to withstand.

Even with the passage of the 1988 trade bill, the new administration will need to return to Congress for legislation to implement whatever agreements are reached in the Uruguay Round. When the president does so, he should use the opportunity to seek fundamental changes in U.S. trade law. The biggest bargaining tool the United States has, and often the major factor motivating other countries to action, is the prospect that Congress might pass protectionist legislation. Why use that leverage only before negotiations begin and again at their conclusion? If Congress, in its delegation of negotiating authority, were to establish intermediate deadlines, it could stipulate that any agreements reached on those dates contain contingency clauses that would later abrogate them if further progress were not forthcoming in the negotiations. This would certainly increase U.S. bargaining power in multilateral talks.

Deadlines compel an administration to take action on trade policy issues. Executive branch leaders rarely focus upon trade issues unless they are forced to by Congress. As deadlines approach, trade invariably receives higher-level political attention. Deadlines force decisions, and forcing clear decisions about U.S. trade policy goals would mark a major change for the better.

At the same time, U.S. trade laws should be reoriented toward pressing other countries to open their markets, rather than toward protecting domestic industries. There should be more emphasis upon deterrence and retaliation for the purpose of strengthening adherence to the internationally established rules of trade.

Although the U.S. government frequently imposes sanctions against trading partners, those sanctions almost always come with protectionist rather than market-opening intent. Indeed, the administration of the anti-dumping and countervailing duty statutes is almost like an entitlement for complaining firms. An alternative approach stressing retaliation against foreign barriers that violate multilateral trade rules is needed.

The 1988 trade law gives new emphasis to removing foreign barriers, but by leaving the existing protectionist apparatus in place it inhibits U.S. trade negotiators from assuring their foreign counterparts that opening markets to U.S. products will end any possibility of U.S. sanctions. Retaliation against unfair foreign barriers should not just supplement the current procedures for protecting U.S. industries from foreign competition; it should gradually replace them. Perhaps some of the current laws could be traded away in the Uruguay Round and replaced by a specific policy of retaliation, granting the president flexibility to impose and withdraw retaliatory penalties.

Domestic policies to ease the pain of adjusting to economic change are an important but often neglected component of the drive to liberalize international trade. The new administration must not be guilty of the same neglect. Toward this end, new efforts to retrain displaced workers and to encourage them to move to areas where their skills are in demand must be part and parcel of the adjustment process. Existing government programs have, by and large, failed to teach displaced workers useful skills and to move them into jobs that do not entail substantial loss of income. New ideas and new experiments are badly needed. Once a new program is in place, the next president should seek to phase out programs that shelter U.S. industries from international competition or those that encourage uneconomic production. These programs redistribute income within the United States at a substantial loss to economic efficiency while causing both producers and workers to make economically unwise decisions.

Keeping the economy open also means encouraging the flow of private investment across international borders. The new administration must vigorously attack the resurgent chauvinism that finds foreign investment in American farms and factories somehow harmful to the United States. But, at the same time, it must insist that if foreign citizens have the opportunity to invest in the United States without discrimination, Americans should have precisely the same opportunities abroad.

IV

The third major economic challenge confronting the new administration is the need to rebuild international economic institutions so that they may be relevant in the world of the 21st century. This painful process will offer few short-term rewards, but it is essential if the trend toward greater economic integration among the world’s market economies is to be maintained.

The international organizations created in the wake of World War II have long since ceased to function as they did when the United States was the world’s dominant economic power. The GATT, which covers a decreasing share of world trade, can be revitalized only if its members are successful in achieving major breakthroughs during the Uruguay Round. The Bretton Woods agreement establishing fixed exchange rates has long since been abandoned, replaced first by limited floating currencies, then by freely floating currencies and then, since 1985, by ad hoc agreements among major countries to control the level of the dollar—agreements which, unfortunately, have kept the U.S. currency from falling further despite the continued large U.S. trade deficit. As Europe moves to establish a central bank and Japan becomes accustomed to its new role as the world’s largest international creditor, the door may be opened to new ideas about the functioning of the international exchange rate system.

While strengthening the international institutions is important, moving to a formal system designed to keep exchange rates within specified levels is neither a realistic nor a desirable step during the next few years. In general, the question of exchange rate stability has received far too much attention in discussions of the nation’s economic problems. The value of the dollar is not and should not be the U.S. government’s principal economic concern.

Although the volume of foreign currency trading in world markets is enormous—in 1986, more than $330 billion changed hands daily on exchange markets, compared with an average of $5.8 billion in trade on a daily basis—the impact of currency trading on the world economy is far smaller than the volume of transactions would suggest.

Over 85 percent of the currency dealing during 1986 occurred between banks—or between banks and other financial organizations, each of which held very short-term positions in the spot market in order to earn trading profits. In many of these cases, traders were in and out of the market in a matter of hours. Only a tiny proportion of foreign exchange activity involved other types of businesses, such as manufacturers. Although some companies do make use of the currency futures markets in order to hedge their business risks, currency futures trading accounted for only one-twentieth of the foreign exchange transactions undertaken by banks. And there is now ample evidence that short-term changes in currency values are reflected in import or export prices only to a small degree in many industries.

A commitment to maintain the exchange rate is tantamount to saying that the dollar’s rate of exchange is the nation’s major economic objective. The main tool available to meet that objective is monetary policy: tighter money, raising domestic interest rates, increases demand for domestic currency and causes the exchange rate to appreciate, while easier money leads a nation’s currency to lose value relative to others. If monetary policy must be fully committed to exchange rate stabilization at all times, it is not available for domestic purposes. A monetary policy to lower interest rates in order to stimulate domestic investment, for example, would not be permitted unless other countries chose to do likewise; if one country’s interest rate were to be allowed to fall while others were not, the country would be violating its pledge to maintain its exchange rate.

In the context of the European Monetary System, where member economies are already closely tied to one another through participation in the European Community and will become even more tightly integrated in the next few years, a commitment to use monetary policy solely for exchange rate management is both economically sensible and politically feasible. Such a commitment is far less appropriate for the United States, given that trade with other industrialized countries remains a much smaller share of America’s total output than is the case in Europe, and given America’s much lesser degree of economic integration with the rest of the world. Nor would it likely be politically acceptable to direct the Federal Reserve to manage monetary policy solely to keep the exchange rate in line, without regard for the health of the domestic economy.

The other two Bretton Woods institutions, the World Bank and the International Monetary Fund, are in disarray, due in good part to their continuing ineffectiveness in resolving the massive debt problems of the developing world. Their inability to address the debt problem, save by prescribing orthodox free-market economic reforms, points to the need for a fundamental rethinking of their role in the world economy. At the same time, the United States should recommit itself to support these institutions in new roles. The issue is political as well as economic. If the United States reduces its participation in the World Bank or seeks to diminish the institution’s importance, it creates an opportunity for other nations to expand their economic influence as America’s contracts.

A less well-known international institution, the Bank for International Settlements, has made a major contribution to improved economic stability by beginning the arduous task of bringing the banking regulations of the world’s major financial nations into harmony. The new administration should wholeheartedly support this effort. It should also encourage similar actions among securities regulators. The world is in many ways becoming a single financial market. Regulatory inconsistencies among nations, however, can put some investors at a disadvantage in doing business abroad, and they give rise to undesirable side effects, most significantly the possibility that loose regulation in one country will contribute to the collapse of financial institutions in countries halfway around the globe. Again, the Congress, which has been struggling unsuccessfully to write a comprehensive banking bill for the past six years, will have to be convinced to play a constructive role in this process.

Stepping up to these challenges will be difficult under conditions of economic prosperity. It will be even more difficult if the six-year-old economic expansion in the United States comes to an end early in the next presidential term. Recession will sharply increase the budget deficit by reducing income tax revenues and augmenting demands on social programs, and it will give renewed strength to forces of protection and economic isolation that will surely seek to blame foreigners for the loss of U.S. jobs. Yet the threat of recession is all the more reason to proceed quickly with the unpleasant task of reducing the imbalances in the U.S. economy.

Under present circumstances, the government’s economic tools are not available to deal with a declining economy: monetary policy has been committed to stabilize the dollar’s exchange rate at unrealistic levels, while expansionary fiscal policy measures would require a further increase in a budget deficit that is already unacceptably large. Reducing the budget deficit and with it the trade deficit would ease the pressures on both monetary and fiscal policy in subsequent years, increasing the government’s ability to use either or both to counteract recession.

V

In implementing these policies, the next president needs to work more closely with other major countries from the outset of his administration on economic as well as defense matters. Former President Nixon’s proposal that the first undertaking of the newly elected president should be to spend two weeks with America’s European allies should not be taken in jest. Basic forums for intergovernmental cooperation, from the annual economic summit meetings of national leaders to the semiannual meetings of trade ministers, are already in place. While the United States no longer has the power to compel its major trading partners to act as it desires, it still is recognized as a leader and its ideas command attention. After all, the United States is the world’s only superpower in both economic and military affairs. But following years of failure to live up to its promises that the budget deficit would be addressed, the United States lacks credibility with its trading partners. The new administration will bear the burden of convincing other nations of the sincerity and worth of its initiatives and commitments.

International cooperation will be complicated by America’s new relationship with other industrial countries. The European Community now has a combined national income comparable to that of the United States, and Japan is closing the gap. Although both have an abiding interest in promoting a stable global economy, neither has taken the lead to ensure it. Each will have to bear more responsibility for the smooth functioning of the world economy. Joint leadership will be necessary. Joint leadership, however, is less stable and more prone to delay than leadership exercised by a single dominant country. Nevertheless, all countries have common concerns and common interests. Each has a vital stake in the management of interdependence, because its welfare depends on other countries as never before.

An important step both in devising the new administration’s economic programs and in convincing the world of their seriousness is the selection of economic policy staff members who are competent, respected and nondogmatic. On such issues as trade and management of developing country debt, poor staff work has plagued the Reagan Administration, leading to impractical or ill-conceived negotiating proposals and an inability to offer constructive responses to proposals by other countries. The general quality of appointees, particularly in fields related to foreign affairs, has declined during the Reagan years, due to the increased use of political criteria in their selection.

The staffing problem extends beyond political appointments to the civil service. After 12 years of government by presidents who ran against the Washington establishment and demeaned the abilities of those who chose to work for the federal government, many of the best and brightest no longer seek out federal service. Improving the caliber of career government workers is less a matter of monetary compensation than of attitude. It is important to restore the sense that those in public service can make important contributions to the nation’s well-being. Only the president can do this.

As international economic affairs come to have ever greater influence over the state of the domestic economy, the question of who will represent America’s interests in international economic negotiations looms ever more important. The United States needs to develop a cadre of career specialists in international economic policy that can provide continuity and negotiating expertise in senior civil service and subcabinet positions. Greater stability among support staff and negotiators is vital if the United States is to hold its own in consultations with countries such as Japan and Britain, whose representatives often bring decades of preparation to the bargaining table. As a recent book on the making of foreign economic policy pointedly notes: "The United States must soberly face the question of whether in the closing years of the twentieth century, a system of international economic relations can be fashioned and run by amateurs, even by brilliant and well-intentioned amateurs, recruited for a brief stint in positions of power."

Along with better staffing, the new administration must reexamine the organizational arrangements within which economic policy decisions are made. Although the Reagan Administration has made extensive use of interagency economic task forces at the cabinet, subcabinet and staff levels, there has been little opportunity to examine the interrelated effects of trade, monetary and investment policies. No attempt was made to coordinate economic issues in a fashion similar to the National Security Council’s coordination of defense and diplomatic matters. Only late in the Reagan years did the influence of Treasury Secretary James A. Baker III result in many of the strands of economic policy being gathered together in one place.

The growing diplomatic ramifications of trade policy, the interdependence of trade and financial flows and the increasingly frequent conflict between security concerns and international economic concerns make it desirable to establish an international economic policy council in the White House. The council, with a staff reporting to the president, would be charged with coordinating decision-making on international economic concerns and with bringing harmony to the policies of the diverse agencies involved, from the Department of Defense, to the Department of Agriculture, to the Office of the U.S. Trade Representative.

Realistically, titles and positions on organization charts will not determine how decisions are made. In any administration, power will flow to those officials who best understand how to wield it. But as the experience of past administrations, notably that of Richard Nixon, has shown, an energetic and politically astute staff that coordinates deliberations on international economic issues can have a salutary effect. The Nixon Administration’s Council on International Economic Policy, established in 1971, had a small staff, but through high-level meetings each morning and special working groups to tackle major issues it managed to coordinate the activities of the Treasury and the U.S. Trade Representative. As two participants relate, "Once a single overall structure was in place to resolve broad issues in policy, assignments of day-to-day responsibilities for particular issues created fewer jealousies and bureaucratic rivalries." Although it will by no means resolve all problems and conflicts, such a structure deserves emulation.

At the same time, the new administration should resist proposals to establish a cabinet-level department of trade combining the negotiating duties of the U.S. Trade Representative with the Commerce Department’s responsibilities to promote exports and to rule on complaints that foreigners are engaging in unfair practices in sales to the United States. The Commerce Department, which would likely become the heart of such a new agency, has in recent years been extremely sympathetic to claims by U.S. companies that unfair foreign practices are the source of their competitive problems, and has little record of taking broader national interests into account in its advocacy. Putting all trade responsibilities in a new department could make the thrust of U.S. trade policy far more protectionist and mute the voices of those presently charged with finding ways to reduce the restrictions impeding foreign trade.

VI

Reorienting the nation’s international economic policy will not be possible without much closer cooperation between the executive branch and Congress. It is here, most of all, that the efforts of recent U.S. administrations have fallen short.

Instinctively, members of the executive branch tend to regard Congress as an obstacle to the making of economic policy, not as a partner. Among conservatives, a narrow constitutionalism holds that the international realm in particular is the exclusive province of the president, and that attempts to exert congressional influence should be kept at bay. But the truth is that in foreign economic policy, just as in other aspects of foreign affairs, only policies enjoying broad, bipartisan support are likely to meet with success. Constitutional jurisprudence aside, the hard fact is that if Congress is not adequately consulted as decisions of international economic import are made, it has the ability to blunt many key presidential initiatives. That happened repeatedly during the latter years of the Reagan Administration. Congressional dissatisfaction with the president’s management of trade issues resulted in passage of a trade bill to which the president had a strong objection, while congressional frustration with the Administration’s reluctance to be more active in resolving developing-country debt problems was demonstrated by delayed approval of an increase in the U.S. contribution to the capital of the World Bank.

Working more closely with Congress will most assuredly not be easy. Internal reforms have diffused power widely within both the Senate and the House of Representatives. Dozens of committees and subcommittees have jurisdiction over one or another aspect of international economic relations, and the weakening of the seniority system means that the executive branch cannot assume that a handful of leaders can make commitments for committee members. A reduction in the number of congressional subcommittees might make relations less contentious, but this does not seem to be in the cards.

Yet the task of maintaining close cooperation with Congress on international economic matters is not impossible. By and large, members of Congress expect and wish the initiative on foreign economic policy to come from the president; their desire, aside from closer consultation, is that the president shield them from constituent pressures to favor immediate local concerns over broader national interests.

This suggests two essential components to better relations with the legislative branch. The administration should consult regularly with congressional leaders of both parties on issues of trade, exchange rate policy and relations with multilateral lending institutions, in an attempt to establish a bipartisan consensus, much as it does on military and foreign policy concerns. Encouraging closer congressional involvement in GATT negotiations by, among other steps, appointing individual members of Congress as part of the U.S. negotiating team, would be a good way to start. And the administration should understand that if individual senators and representatives are to support society’s interest in an open world economy against the more parochial interests of individual companies or groups of workers, they must be able to demonstrate their responsiveness to constituent concerns in the process. The president must repeatedly inform the public not only of the economic benefits of an open economy, but also of the steps the government is taking to address unfairness abroad and to aid those harmed by trade liberalization at home. Programs to aid displaced workers and studies of how imports are affecting specific industries are a small price to pay for maintaining political support for a liberal international economic order.

Dealing with the three overriding economic challenges ahead—reducing the federal government’s budget deficit, maintaining an open world economy and rebuilding international economic institutions—will do little to boost the political popularity of the new administration. There are few votes to be gained from increasing taxes, negotiating trade liberalization agreements and redefining the role of the World Bank. Righting the imbalance in the world economy necessarily means slowing the growth rate of personal consumption in the United States, which translates directly into fewer new cars, shorter vacation trips and fewer meals out. The negative reaction from voters is unlikely to be mitigated by promises that the shift from a consumption-driven to an investment-driven economy will allow for growth in consumption in years ahead.

Yet the alternatives are not pleasant to contemplate. Sooner or later, foreigners will cease to be willing to lend their money to finance consumption in the United States. Under present conditions, that would force interest rates much higher, choking off business investment and rapidly driving the United States into recession. Higher interest rates and fewer export opportunities would force developing-country debtors into default, endangering the stability of major banks. That, and the failure of many companies that have acquired excessive loads of debt, could drag the economies of other nations down as well. An upsurge in protectionism and a disintegration of global economic ties would surely follow—and would not bode well for President Bush’s prospects for reelection in 1992.

One way or another, the world economy will find its way to a state of better international balance. With forceful, far sighted leadership and credible changes in policy, President Bush can help those changes occur in an environment of economic growth rather than economic decline.