The Year Ahead - Similar to the One Behind Us?

Sanjay Paul
December 25, 1997

"A year ago, the economy had low inflation, low unemployment, low interest rates and moderate economic growth....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."

That is what I wrote in a Business Forum article last year ("Tax Reform, Trade Will Be Issues Worth Watching," Green Bay Press-Gazette, December 29, 1996.) Replace 1997 by 1998, and the description of the U.S. economy remains remarkably ap t another year later.

But there are some important - and disturbing - differences. While the beginning of 1997 seemed relatively free of imminent problems, we cannot say the same of this year. In the short term, the source of deep concern is the performance of what was only r ecently considered the most dynamic region of the world - the economies of East Asia.

The fear of Asian contagion hangs heavily over the global economy. With every fresh release of troubling economic news from the region, stock markets around the world shudder and the threat of a slowdown sweeping across the globe becomes slightly more li kely.

In order to head off such a frightful denouement, Western governments and multilateral organizations such as the International Monetary Fund and World Bank have joined in a massive effort to provide succor to the beleaguered East Asian economies. If all goes well, and it is not yet clear that it will, Asia's currencies will stabilize, their banking systems will be revamped, the cozy industry-state relations that promoted inefficient oligopolies will be scaled back, and restrictions on foreign trade and i nvestment will be dismantled. But accomplishing all this is not going to be easy. Governments will have to restrain their innate urge to confer privileges on the chosen few, allow poorly-managed conglomerates to fail, and countenance greater foreign compe tition in hitherto protected domestic markets. Although these reforms will hardly be embraced warmly by the masses - the proposed measures are likely to inflict pain in the short run - they will leave the economies stronger and more competitive in the lon g run.

And let's not forget the innate strengths of the East Asian economies that brought them out of relative backwardness into remarkable prosperity in a matter of a few decades. These countries enjoy a well-educated labor force, high savings rates, smallish budget deficits, and - contrary to received wisdom - a strongly capitalist ethos. The current problems notwithstanding, the long-run prospects for the region are extremely good.

What does 1998 have in store for the U.S. economy?

Health care: On the health care front, costs threaten to escalate rapidly once again as the progress made by managed care in the last couple of years appears to have stalled. Consumers are clamoring for unrestrained access to their choice of physi cians - thereby undermining the efforts of the industry to reduce physician costs. Critics of HMOs, seizing upon reports of duplicitous dealings at certain firms - notably, the egregious excesses of Columbia/HCA - are likely to press for further restraint s on the ability of HMOs to enter into cost-cutting agreements with doctors and hospitals. All this is likely to result in higher health insurance premiums, thus increasing the employee compensation costs for most businesses.

Taxes: There is likely to be more than the usual to-do about tax cuts, as politicians - thanks to a roaring economy - will find themselves sitting on a small budget surplus. Expect a lot of guff about "returning the taxpayers' money" - but actual reductions, if any, are likely to be modest. In fact, the much-heralded 1997 tax changes - and, in particular, the treatment of capital gains - are likely to leave most taxpayers in April 1998 wondering about the usefulness of it all as they grapple with a new and complex web of tax deductions and credits.

Trade: The trade front promises to be fairly quiet as well. With the big debates on NAFTA and WTO well behind us, only mopping-up operations remain. Occasional disputes will flare up, as in the case of Kodak vs. Fuji over access to Japan's photogr aphic film market, but the WTO seems equal to the task of settling these. The loosening of trade restrictions in financial markets in East Asia promises to provide significant opportunities for American firms in the securities, banking and insurance secto rs.

Deregulation: Things should heat up in the utility and telecom markets as they are thrown open to greater competition. Perhaps in the near future, consumers in Wisconsin will be able to buy electricity from a utility company in California, make a local telephone call through AT&T and place a long-distance call through Ameritech. Thus far, consumers have been disappointed with the implementation of the Telecom Act of 1996 which promised to provide telephone and cable companies unhindered access to each other's markets.

Bill Gates: If one must feel sorry for a multi-billionaire, Mr. Gates makes a deserving candidate. Microsoft's dominance in PC operating systems has struck fear into its rivals, sparked criticism from the likes of Ralph Nader, and attracted a grea t deal of unwelcome attention from the Justice Department. For all of his astonishing success in revolutionizing the personal computer industry (along with Intel's Andy Grove), Mr. Gates is, in the eyes of some, America's Public Enemy Number One.

The battlegrounds for 1998 are clearly drawn: the Internet browser market and Java computer language. Critics of Gates argue that Microsoft will exploit its operating system dominance to monopolize the Internet. Microsoft denies this, naturally, and asse rts that only the marketplace will determine the success of its - and its rivals' - products. The courts will be looking at this for a long time to come.

State government: No peek at the crystal ball is complete without a look at the usual gang of suspects at the more local level. Welfare reform and school choice have become staples of public policy debate in recent years. In the vanguard of the mo vement toward greater private- sector participation, Wisconsin's innovative W-2 program and experiments in school choice will continue to attract scrutiny from other state governments.

In December 1996, I wrote: "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 l ow inflation, low unemployment, low interest rates and moderate economic growth."

Despite the "unforeseen circumstances" - viz., Asia's financial flu - the prognosis for 1997 did turn out to be correct. Will 1998 yield more of the same for the U.S. economy? Much depends on how quickly - and decisively - East Asian governments swallow their medicine.

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