1997 - A Continuation of 1996?

Sanjay Paul
December 1996

A slightly revised version of this article appeared as "Tax Reform, Trade Will Be Issues Worth Watching" in Business Forum, Green Bay Press-Gazette, December 29, 1996.

A year ago, the economy had low inflation, low unemployment, low interest rates and moderate economic growth. And Bill Clinton was President.

One year later, things seem to be pretty much unchanged. Heading into 1997, the U.S. economy enjoys low inflation, low unemployment, low interest rates and moderate economic growth. And, oh yes, Bill Clinton is still President.

There has been one significant development, however: the inexorable ascent of the stock market. Despite occasional fears of interest-rate increases, worries about slowdown in corporate earnings growth, and even admonitions from Alan Greenspan, the Dow Jones Industrial Average has surged mightily ahead, posting a spectacular gain of 25 percent for the year.

There have been other developments during the year, although the passage of months, or even weeks in some cases, seems to have dulled their significance. But their import may turn out to be long-lasting.

Consider the elections, for instance. How distant they appear now -- the bids for the Republican nomination by the fire-breathing Pat Buchanan, the flat-tax spouting Steve Forbes and, of course, the dry-humored Bob Dole who relinquished his Senate position to run for the Presidency. (On the Democratic side, there was none of this excitement; Clinton ran unopposed for his party's nomination.)

Dole was duly anointed by the party faithful at the Republican convention. But internecine squabbles among warring factions in the party and a glaring inability to present a striking contrast with Clinton's candidacy doomed Dole's presidential bid. Even a last-ditch attempt at currying favor with the masses failed to work; the promise to cut taxes by 15 percent was perceived by voters to be an ill-advised policy, and they duly turned it down.

Although the Republicans failed to wrest away the presidency, they may have successfully left their imprint on the country's economic agenda.

First, Forbes's flat tax. Despite concerns about the deleterious effects of a flat tax on the budget deficit and various sectors of the economy, Forbes's proposal elicited wide support by holding out the promise that the Gordian knot of the present tax code could be cut at one stroke - and replaced with a much simpler system. Indeed, following Forbes's initial success, a number of related proposals were floated in the Congress; among the more ambitious ones, a tax form no larger than the size of a post card.

Will we move to a flat-tax system? Not likely. Nonetheless, there is interest in a "flatter" tax system - one with fewer tax brackets and lower tax rates. And the Congress is likely to consider alternatives to the present arrangement. Discussions on replacing the income tax with a "consumption" tax have already begun. It is still too early, however, to tell how they will go.

Another left-over from the elections is tax cuts. Although Dole's promised tax cuts took him nowhere, the idea still holds tremendous allure for politicians. For the next few months, however, concerns about the budget deficit are likely to prevent any significant reduction in taxes. Come election time, the tune is likely to be different, as candidates try to out-taxcut each other once again.

A third issue of significant import is the reform of government programs such as Social Security, Medicare, Medicaid and welfare. In response to growing pressure, Clinton did sign a welfare reform bill (which, apparently lacking in resolve, he has promised to change next year). While both Clinton and Dole kept artfully mum about the rapidly-escalating government expenditures on social security and the two health insurance programs, the subject came into prominence during the election campaigns. Now that the elections are over, a sober look at the finances of these programs is in order. In each of these cases, the outlays by the government are growing far more rapidly than the payroll revenues necessary to finance them. In the next year, Clinton and the Congress are likely to propose remedies for the problem. Or, at least, one hopes they will.

During their campaigns, both Clinton and Dole were reticent on the subject of international trade. Perhaps their silence revealed the similarity of their stance: both are generally in favor of free trade, and regard trade agreements such as the Uruguay Round and NAFTA as desirable developments. In the World Trade Organization (WTO) meeting that was concluded in Singapore recently, the U.S. managed to wring an agreement enjoining countries to lower their trade barriers for high-technology goods. American companies engaged in the exports of computers, software and suchlike stand to gain.

What are the trade issues that are likely to emerge next year? One is the contentious issue of labor and environmental standards. The U.S. and other developed countries want developing countries to impose minimum-wage laws, permit the creation of unions, and toughen up environmental safeguards. Developing countries perceive these requirements as inimical to their interests. They argue that these impositions would raise their costs of production, create legions of unemployed and hinder economic development.

Another trade issue on the horizon is Chile's membership in NAFTA. Long a star performer in South America, the Chilean economy is poised to join the U.S., Canada and Mexico in their free trade area. It is an addition that Clinton favors; with the elections out of the way, Clinton is likely to seek Congress's approval for Chile's membership.

With 1996 drawing to a close, and the economy in fine fettle, one is sorely tempted to prognosticate a similarly benign outlook for 1997. Barring unforeseen circumstances, the U.S. economy in 1997 should continue to enjoy low inflation, low unemployment, low interest rates and moderate economic growth. And Bill Clinton's presidency.

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