Context: Prosperity in a Troubled Sea

President Clinton celebrated "a new dawn for America" in his State of the Union address--and why not? The country is experiencing the longest economic expansion since the sixties. Unemployment is at its lowest peacetime rate in more than forty years. Inflation is nonexistent. The budget is generating record surpluses. Home ownership is the highest in history. And in the past two years wages have been going up across the board, with African-Americans and Hispanics experiencing the lowest unemployment rates since 1972, when figures for those categories were first recorded. Stocks are at record levels; America is the envy of the world. The strong economy buttresses Clinton against his foes and bolsters Democratic hopes for 2000.

But the confidence of the White House in public is accompanied by the stone-cold dread of Treasury Department economists in private. America trips lightly, but on a high wire, in strong winds, without much of a safety net. The world is suffering what the President calls the "worst financial crisis since the Great Depression." Countries accounting for about a third of the world economy are in recession. Japan, the world's second-largest economy, is still sinking. Russia's gangster capitalism has gone belly up. Brazil, the firewall against the contagion's spread to Latin America, is going down.

As he moved aggressively to lower interest rates last fall, Fed chairman Alan Greenspan warned that the United States would not remain immune to the global tribulations. The effects are already apparent even at the height of prosperity. The ravaged economies have no option but to try to export their way out of collapse. With Europe and Japan sustaining surpluses, the United States becomes the buyer of last resort. The trade deficit is soaring--headed toward $300 billion in 1999. We've been losing manufacturing jobs since last April. Corporate profits are down. Companies unable to raise prices slash costs and cut workers. Mergers worth a staggering $2.5 trillion were announced last year. According to the placement firm Challenger Gray, last year was the worst year for corporate layoffs in the nineties, with worse yet to come.

In a January speech at the Detroit Economic Club, the President argued that "nations purchase prosperity by saving and investing and being prudent." But these days, the fate of the global economy depends to a large extent on whether US consumers keep spending recklessly.

Over the past months, US consumers, buoyed by record stock prices and low interest rates, have been spending more than they are earning. This leaves central bankers across the world terrified at what they see as a pure speculative bubble in US stocks. The establishment Financial Times "Lex" column flatly says US stocks are overpriced by about 50 percent. Greenspan's complaints about "irrational exuberance" were issued when the Dow Jones average was nearly 3,000 points lower than it is now and corporate profits were stronger. A stock market "correction" could sober up consumers, with devastating effects around the globe.

But the political effects may not depend upon a stock market crash or a recession. What is already happening--rising trade deficits, accelerating mergers, increasing layoffs, greater insecurity for working people--will curb the growing optimism that working people have about the economy. Despite the longest period of growth since the sixties, non-college-educated working people haven't regained ground lost over the past twenty years. More go without health insurance or are underinsured as employers force them to pick up more of the tab. Inequality is at record levels and getting worse. In the richest nation in the world, one in five children is raised in poverty.

Any Democratic strategy based on riding the wave of prosperity to victory in 2000 is surfing stormy seas. And the global turmoil calls into question the conservative core of Clinton's economic agenda--austere budgets crafted for Wall Street and a trade policy catering to global corporations. As the effects of global deflation wash up on these shores, budget surpluses may help push the country into recession. With speculative capital flows now leveling entire nations, the question is how to control capital, not how to free it up.

Clinton--whose political survival instincts are unmatched--has scrambled in recent months to get ahead of the wave. We can't rest on our laurels, he says. We must meet the "long-term challenges that our people face," including making the "world economy work for...ordinary citizens throughout the world." Clinton has begun to change his rhetoric, if not his policies. He's warned the Japanese to lower steel exports to America to pre-crisis levels or else. He's echoed progressive concerns about the "race to the bottom," calling for protections for workers and the environment and for a "new global architecture" to curb destabilizing speculative capital flows. With his characteristic amalgam of bold words and small gestures, he's scrambled to inoculate himself politically from what may come next.

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