“The U.S. economy remains almost comatose. … The current slump already ranks as the longest period of sustained weakness since the Great Depression. … Once- in-a-lifetime dislocations … will take years to work out.”
That’s how Time magazine described the dismal state of the U.S. economy – in September 1992. The passage has been making the rounds in financial circles, a token reminder that today’s pessimism may turn out to be too extreme.
Almost before that Time article reached the recycling bin, the U.S. economy was humming again. Real gross domestic product rose 4.3 percent, both in the fourth quarter of 1992 and on a year-over-year basis – and for the rest of the decade the United States never looked back.
Bullish pessimism
Could it happen again? When it comes to financial markets, pessimism is a buy signal. Can the same be said about economic pessimism?
One should never underestimate America’s capacity for self-renewal, its spirit in the face of adversity. The unexpected Clinton-era boom owed a lot to a technology-driven leap in productivity growth, which had slumped to about 1.5 percent from the mid-1970s to mid-1990s, then bounced back to 2.5 percent.
Right now it’s difficult to see what might come along to goose U.S. productivity in the same way. The foundations for growth that were in place then are missing now.
Peace dividend
Take declining deficits. The end of the Cold War saw defense spending fall from 5.2 percent of GDP when Clinton took office to 3 percent in 2000.
At the same time, the tech bubble of the last half of the 1990s and a capital gains tax cut in 1997 produced a revenue windfall for the U.S. Treasury as investors took profits. Personal income taxes as a share of GDP rose to a record 10.2 percent in 2000. The federal government posted its first budget surplus in almost three decades in 1998. It wasn’t until 2002 that wars, tax cuts, recession, and a less ebullient stock market conspired to bring the deficit back with a vengeance.
Parallel universe
In political terms, this election year is shaping up to be a lot like 1994, when the Republicans wrested control of both houses of Congress from the Democrats.
In response, Clinton moved to the center, something that many business leaders would welcome from President Barack Obama. Rightly or wrongly, many blame the current confidence slump on Obama and the Democratic Congress.
If we won’t compromise, we’d better find a way to grow the pie. One way would be real tax reform – scrapping the Internal Revenue Code and replacing it with something simpler and flatter. Forget targeted tax cuts, which simply create more opportunities for gaming and more business for lobbyists.
U.S. businesses and households will devote more than 7.5 billion hours this year to complying with income tax laws, according to the National Taxpayers Union’s “A Taxing Trend” report for 2010.
“Given the huge amount of expense our overcomplicated tax system imposes on us, fundamental tax reform would be one of the best ways imaginable to stimulate our economy without plunging the country further into debt,” writes David Keating, senior counselor at the Taxpayers Union.
He advocates replacing the “current mess” with a flat tax or national retail sales tax. America would need a national grassroots movement and perhaps a constitutional amendment to force through such a reform. That would be a worthy final act for the baby boomers – and it might help bring back the boom. •
Caroline Baum is a Bloomberg News columnist.
