WASHINGTON -- The economy is gaining strength by the day -- but who should get the credit?
Yesterday it was a huge drop in first-time unemployment benefits claims and a jump in house sales. The day before it was soaring consumer confidence and optimism that manufacturing output would grow next year.
So much good news is now coming in that economists are beginning to worry whether the economy can sustain such a growth rate, expected to be around 4.5 percent in the last quarter of this year.
Predictably, the Clinton administration has been quick to seize the credit for the positive news. To hear White House aides tell it, the seeds of economic growth were sown during a 6 1/2 -hour meeting in Little Rock, Ark., on Jan. 7, 1993.
At that session, according to the official version, President Clinton and his top economic advisers brainstormed their way to fundamental conclusion: The short-term problem of a sputtering, weak economy failing to create jobs could be solved only by deficit reduction.
"I think that was really a seminal moment, not only for the administration but for the economy," recalls Robert Rubin, the Wall Street banker recruited by Mr. Clinton to coordinate economic policy inside the White House as director of the new National Economic Council. "The point was made that until the deficit was under control, you couldn't have a better economy."
The result of the reordered priorities, according to Mr. Rubin: lower interest rates, increased investment, consumption, productivity and the brighter prospects for 1994.
But independent economists are not so ready to credit the Clinton team with engineering the recovery.
Mr. Clinton campaigned on the need for growth, and his original economic package included a $30 billion stimulus program to create 500,000 jobs in the administration's first two years. This would have increased the deficit in the short run. Only in the face of intense congressional resistance to new spending did Mr. Clinton finally drop his growth plan and switch to the issue Ross Perot had put on the political front burner: deficit reduction.
Congress, bowing to public pressure for deep spending cuts, proved to be more enthusiastic about deficit reduction than the converted Mr. Clinton. He wanted $267 billion in new taxes and $139 billion in spending cuts, a total of $406 billion in deficit reduction over five years. The nation's legislators reworked the priorities, eventually approving $241 in taxes and $255 in spending cuts, a total of $496 billion.
Economy on the mend
Economists also say the economy was already on the mend before Mr. Clinton even sat down to plot economic strategy with Mr. Rubin, Treasury Secretary-elect Lloyd Bentsen, Budget Director-to-be Leon Panetta and his chief presidential economic adviser, Laura d'Andrea Tyson.
Officially, the recession began in July 1990 and ended in March 1991, almost two years before Mr. Clinton took office. Economic growth in the fourth quarter of 1992, during which Mr. Clinton was elected on a wave of public dissatisfaction with the Bush administration's economic management, came in at an explosive rate of 5.7 percent.
"The Bush recovery was moving right along," says Paul W. Boltz, financial economist with T. Rowe Price Associates Inc., of Baltimore. He now sees 1994 as potentially the best year for the economy since 1988 but questions how much impact the Clinton policies have had on the prospect.
Diane Swonk, economist with the First Chicago Corp., is equally skeptical.
"It certainly was a whole stew of things that contributed to the economy improving now," she says. The kind of effect the Clinton administration can have is marginal," she says.
One thing is certain: When Mr. Clinton moved into the White House, he was confronted by the most sluggish recovery of recent times. Economic growth was low (the nation's total output of goods and services grew a meager 1.4 percent during the first half of this year, a drastic collapse after the the late 1992 spurt) and unemployment high (above 7 percent).
This put the nation under a pall of pessimism that masked what was starting to happen as the business cycle gradually shifted from negative to positive gear.
Congress' August passage of the $496 billion deficit reduction package did fulfill Mr. Rubin's prediction that long-term interest rates would drop. From their 7.6 percent level in November 1992, they now stand nearer 6 percent.
"Those were not rates that people on Wall Street would ever have anticipated seeing a year ago, or say a year and a half ago, and I can remember that very well because I was there," asserts Mr. Rubin. "There was absolutely no question in my mind that without the president's deficit reduction program, long-term rates would not be anywhere near as low as they are now."
But other factors were also at play. Interest rates around the world were coming down as economies in one industrial country after another weakened, lessening the threat of inflation and forcing governments to scramble for new growth to counter growing voter discontent.
Oil market depressed
Oil prices were dropping, further lessening fears of inflation and boosting the bond market. The depressed oil market also helped offset the negative economic impact of the Clinton administration's 4.3 cents-a-gallon budget boost in the gasoline tax. At the same time U.S. productivity was increasing, with fewer workers producing more goods and services at lower cost, another harbinger of low inflation.
And, to clinch it all, the Federal Reserve stood by while the signs of recovery here steadily strengthened. The Fed mutely acknowledged that inflation now was less of a threat than economic relapse by keeping the key short-term interest rate at the record low of 3 percent, originally fixed in September last year.
All this helped set the growth trend, now expected to be further strengthened by recent agreements on freer international trade and eventual recovery in Europe and Japan, major markets for U.S. goods.
But there are also risks at large:
* The anticipated European and Japanese recoveries could stall, producing a ripple effect here.
* The tax increases on high-income Americans in the first Clinton budget actually bite this year, threatening to cut consumer spending.
* An increase by The Federal Reserve in short-term interest rates would make credit more difficult and expensive to obtain.
* Defense cuts will continue to inflict damage on the economy and pain on particular communities, and corporate restructuring and downsizing is likely to continue apace.
Ms. Tyson, the president's chief economic adviser, predicts 3 percent growth for 1994, still only half the rate of previous recoveries but more than twice the average annual expansion achieved in the last four, difficult years.
Allen Sinai, chief economist for Lehman Bros., shares her measured optimism. In the December issue of his Economic Outlook and Issues, he writes: "Finally, after the longest period of subpar growth in modern economic history, the U.S. economy enters 1994 in fundamentally good shape and with the best prospects in years."
For Mr. Clinton and the Democrats, facing congressional elections in 1994, this can only be good news. They will be eager to take the credit.