New prescriptions for an ailing economy - Black Enterprise Board of Economists Report

Black Enterprise, Jan, 1993 by Frank McCoy

Every recession has its own internal logic and economic ancestry. But most end similarly after economic sparks ignite and growth adopts a prairie fire pace. That did not happen in 1992 and few are convinced it will happen this year. Yet, faith in economic change has become the new credo. Political leaders respond to the fact that the U.S. economic transformation during the Reagan/Bush years was structural not cyclical. Creating new and sustainable economic growth also motivates the American people, who mouth "change" but agree that the path is neither sure nor short. This desire for economic and political change was the hallmark of the 1992 presidential campaign and still consumes most citizens' hope.

Although the BLACK ENTERPRISE Board of Economists (BEBE) convened in Washington, D.C., last September, their insights and conclusions ring true in this administration. The BEBE sorted through the economic chaff and decided if 1993 bodes well for the nation at large and particularly for African-Americans. For two days, the eight economists under the charge of BLACK ENTERPRISE Editor and Publisher Earl G. Graves debated topics including: the nation's macroeconomic future and black America's economic status; why President-elect Bill Clinton's economic plan best meets black needs and desires; the efficacy (or lack) of enterprise zones; and what really drives "welfare reform."

Board members Andrew F. Brimmer, David H. Swinton, Marcus Alexis and Gerald D. Jaynes presented papers at the sessions. Bernard E. Anderson, Courtney N. Blackman, Earl G. Graves, Edward D. Irons and Margaret C. Simms participated as discussants. Lawrence Johnson, dean of the Howard University Business School, was a guest for the first day.

The group left the sessions with renewed optimism. Their consensus: Black concerns may not drive economic policy but the unavoidable need for America's leaders to respond to structural problems cannot but help better black prospects as well.

Agreed. But African-Americans must work to ensure that our voices are part of any new economic chorus.

Economic Trends And Prospects For 1993

The 1980s' party is long over, but its hangover lingers. This will be another year of slow growth says Andrew F. Brimmer, president of Washington, D.C.-based Brimmer & Co. Inc., an economic and financial consulting firm. And there is "little likelihood that the pace will accelerate anytime soon. . . as employment and income, and sales and profits will improve only slightly."

The result: gross domestic product (GDP), which grew by only 1.7% in 1992, is projected to increase by just 2.6% this year. This rate is just one point above the 2.5% needed to ensure new job growth. This is not heartening, since jobs provide income, fueling consumer demand and economic growth.

Brimmer, a former Federal Reserve Board governor, does not foresee any quick return to robust growth. He notes that the GDP rate projected through 1993 is one-third to one-half of the level recorded during the two years after other post-World War II recessions.

What's the difference? The traditional cure for recession--lowering interest rates to inspire plant and equipment investment--has not worked. Since 1991, multiple long-term interest rate cuts have been made. But the inexpensive cash flowed into the stock market. True, stock value soared, but it was an artificial ascent not based upon actual or projected productivity, revenue or income. The CEOs of companies receiving the share boost understood this duality and have been loath to increase worker salaries, hiring or capital expenditures.

In this atmosphere, nonmonetary factors affecting the economy acquire more resonance. The three most powerful in percentage impact on GDP growth are consumer spending (66%), business investment (15%) and residential construction (5%).

These factors reflect individual and corporate confidence levels in the economy. Consumer spending depends upon disposable personal income, relative prices, consumer debt and interest rates, in that order. Business investment is influenced by expected investment return, tax rates and borrowing costs. Residential construction depends upon disposable income, demographic factors, mortgage interest rates and monthly amortization schedules.

Housing starts, personal consumption expenditures and outlays for nonresidential fixed investment have all increased substantially less since the recession ended than 10 years ago. In the five quarters ending June 1992, real disposable income grew just 2.4%. In 1982, it grew 4.7% in the five quarters after the recession.

Brimmer says the minimal increase in income "reflects the virtual stagnation in employment." Only 900,000 new jobs were created through June 1992. "The meager increase in job opportunities is itself a mirror of the modest expansion in aggregate demand," he says.

Anemic growth has one benefit low inflation. But the other side of low inflation is that there is little room for companies to raise prices. Thus, it has been difficult to improve profit numbers in the face of lower consumer demand. Fortunately, as the economy slowly heats up in 1993, profit margins should also rise. They will not recover as quickly as after other recessions, however.