Good-news, bad-news economy may be good for fine-tuners, but . . .
The easiest economy to manage is the mediocre economy. Chancellor Helmut Kohl of West Germany knows this. And that is why his government has for so long turned a deaf ear to American pleas for the German locomotive to accelerate in the good cause of promoting worldwide expansion. The message that mediocrity is the easy way is sinking in at home in the United States. Since mid-1984, American economic growth has been at best middling. Although the Reagan team constantly replays the old record that real GNP will advance by 4 percent in the year ahead, the actual statistics come in as spotty.
US real GNP growth, we recently learned, was at only a 1.2 percent annual rate in 1985's last quarter, a considerable markdown from the first flash report. That's bad news. But the final month's Christmas sales, spendable incomes, and production were strong. That's good news.
Good news. Bad news. Good news. This is the essence of a mediocre economy. I suspect that Paul Volcker, the Federal Reserve chairman, sleeps better under the regimen of mediocrity than he did during the first 18 months of the recovery, when growth was accelerating; and certainly better than during the 1981-82 recession.
Economists like me mark down mediocrity for what it is: continued idle industrial capacity; prolonged joblessness in the neighborhood of 7 percent of the civilian labor force; lagging investment in equipment and plant; lackluster productivity. But it is not economists who set the tone on Wall Street.
Wall Street now seems to like mediocrity. Indeed, a recent news flash that the unemployment rate dipped a bit below 7 percent made money managers fear that a spirited recovery was beginning. Such good news made them panic and dump stocks, contributing to a big loss on the Dow Jones index that day.
There was method in their madness. They feared the Fed would let interest rates rise if business became brisk. The resulting drop in bond prices might well spread to common stocks. So they sold. Fortunately, mediocrity came to the rescue in the form of enough bad balance-of-payment news to keep forecasters uncertain.
Why the mediocrity? Reagan's fiscal deficit is far beyond what any Keynesian nut ever counseled. The Fed has brought interest rates down whenever housing and durable-goods spending seemed to languish.
Frenetic pump priming at home in America immediately leaks abroad. I am reminded of my old school days at Harvard. A classmate lived in an apartment complex where each family had to stoke its own furnace. All winter he shoveled coal, but his apartment remained frigid. Only just before spring did he discover that he had been heating the apartment next door.
From 1982 through 1985, unorthodox US macroeconomics has been stimulating Japan and the Pacific Basin, Europe, and the developing world.
Is relief on the way? The dollar floated downward all through 1985, helped by lower interest rates and by concerted interventions by governments. Devaluation has lowered the clamor for protectionism. So far, however, few objective signs are visible that America's trade deficit is on its way to being cured. Economic theory expects such long lags before devaluation takes hold.
The signs are good for another year of American advance. Disarray in the Organization of Petroleum Exporting Countries is a plus for the world economy. Most important, in my view, is that the economy acts responsive to economic law. Housing starts rise when credit is eased. Auto sales respond to lowered finance charges.
Therefore, even if our forecasts are off, there is room in the mediocre economy for disaster-resisting policy initiatives. We are fortunate that the late 1980s seem to lack the perversities that bedeviled the '70s.
Dr. Samuelson, institute professor emeritus of economics at the Massachusetts Institute of Technology, won the Alfred Nobel Memorial Prize in Economics in 1970.
