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POLICYMAKERS: STEERING WITH BOTH HANDS ON THE WHEELPolicymakers know that one false move could upset a fragile world economyFor politicians and policymakers around the world, 1999 is shaping up as a year of high ambitions--and high anxiety. Washington hopes to spend the year overhauling Social Security's creaky finances and structure. European leaders, after uniting their major currencies into one on Jan. 1, will move to cut unemployment while knitting the Continent into one vast economy. Tokyo at last is hearing--and may even start heeding--calls for bold action to rescue Japan's failing banks and pull its businesses out of a seven-year slump. And for the other crisis countries of Asia, 1999 is the year they can hope their economies will stop shrinking and they can start repairing their banking systems and industries. Leaders know, however, that those great expectations could be shattered. With the World Bank predicting that developing countries will post only 0.4% per capita growth--and that output will shrink in Brazil, Russia, and 34 other countries--industrial nations like the U.S. are shadowed by the risk of recession. After the Asian crisis of 1997 and the Russian default of 1998, financial markets and businesses remain wary that another misstep in Seoul, Brasilia, Moscow, or New York could tip a fragile world economy. Little wonder that, even as they stress their positive outlook for the U.S., top Federal Reserve officials caution that they're ''watchfully waiting'' for danger signs at home and abroad. Central banks are already acting to inoculate their economies. The Fed's three rate cuts in seven autumn weeks eased investors' fears and reduced--but didn't eliminate--the rate premiums lenders demanded from every borrower except Uncle Sam. Eleven central banks in Europe followed on Dec. 3, cutting rates to 3% (3.5% in Italy) in what could be their last independent act before Wim Duisenberg and his new European Central Bank take charge on Jan. 1. Treasury Secretary Robert E. Rubin and his deputy (and likely successor), Lawrence H. Summers, hope that the $41.5 billion international defense package they've cobbled together for Brazil's economy will halt the turmoil in emerging markets. For the U.S., these moves ought to ensure that the economy suffers nothing worse than a mild slowdown in 1999. The consensus forecast of economists surveyed by BUSINESS WEEK--1.9% real growth, down from about 3.3% in 1998, with consumer inflation rising to 2.1% from 1998's 1.6% (page 82)--squares with several senior Fed officials' expectations. ''Unless something else goes really wrong in the world economy, it looks to us like the U.S. will simply be slowing gently,'' says Fed Vice-Chair Alice M. Rivlin. To hit those numbers--and pull off the third ''soft landing'' of Alan Greenspan's 11-year Fed chairmanship--the Fed will probably have to cut its key federal funds rate, now 4.75%, by an additional half-point in 1999. But no move is likely at the central bank's Dec. 22 meeting. MIDDLE GROUND. Washington politicians are counting on that benign outlook to give them time to pursue their pet projects, Social Security reform and tax cuts. The two are linked by a single pot of money--the budget surplus, projected to total $80 billion in fiscal 1999 and $1.5 trillion over the next decade. President Clinton's election-year slogan ''Save Social Security First'' effectively barred Republicans from parceling out the surplus in tax cuts, blocking even the $80 billion package that the House passed in September. But now, Clinton has to deliver on Social Security. The outlines of a reform plan are clear. On Dec. 9, Clinton told congressional leaders he would back the idea of investing part of Social Security's surpluses in stocks and corporate bonds. The contentious question is who'll own those investments: Liberal Democrats say the government should buy the shares, while Republicans and some moderate Democrats insist that any investments should be held by workers in 401(k)-style private accounts. But a deal that combined government investing with small private accounts could satisfy both sides. ''There's clearly a potential middle ground,'' says John C. Rother, chief lobbyist for the American Association of Retired Persons. But the White House and Congress may never find an acceptable route to that compromise. The partisan distrust that normally surrounds Social Security will only be deepened by Washington's impeachment struggle. The same toxic air will probably kill the GOP's plans for big tax cuts, such as estate tax relief. If the Social Security overhaul fails, Clinton will dig in against any more than token tax relief. ''We're holding each other hostage,'' sighs a House GOP aide. BIG RISKS. That poses a problem for Republicans who fret that 1998's do-little Congress cost the party five House seats last November. ''The leadership understands they must produce'' or risk losing control in 2000, says Senator Charles T. ''Chuck'' Hagel (R-Neb.). But producing may mean legislating largely on Democratic turf. House Speaker-elect Bob Livingston (R-La.) will spurn the hard Right's divisive social issues and press for conservative versions of education reform and patient protections in health plans. Hill Democrats, with visions of recapturing Congress in 2000, aren't likely to meet Livingston anywhere near halfway. That could be bad news for business, which is hoping to help the Clinton Administration win ''fast track'' negotiating authority to cut trade deals for farm products, telecommunications, and foreign investment. To win over Democrats, business lobbies are beginning to reach out to labor and environmental groups to agree on safeguards in any new trade pacts. ''We need to be prepared to talk,'' says National Association of Manufacturers President Jerry J. Jasinowski. Hanging over any trade votes will be a massive and growing trade deficit: The current-account deficit is projected to hit $220 billion for 1998 and could top $300 billion next year. ''The likely outlook for the U.S. is positive,'' says Janet L. Yellen, chair of the White House Council of Economic Advisers, ''but the risks from overseas are unusually high.'' CRUNCH TIME. What risks? Brazilian President Fernando Henrique Cardoso's setbacks in winning budget and tax hikes--needed to keep support flowing from the International Monetary Fund--have spooked global investors and halted the recent drop in risk premiums. A run on Brazil could send rates soaring around the world. Japan's credit crunch, which is driving corporate bankruptcies to record highs, could turn into a panic if officials can't persuade--or strong-arm--reluctant bankers to accept bailouts. Banks elsewhere in Asia need a lot of work, too: ''How quickly economies will rebound will depend on the speed with which they fix up their banking systems,'' says Sun Bae Kim, regional economist for Goldman, Sachs & Co. in Hong Kong. In Europe, growth is slowing as exports to Asia fall. Businesses in Germany and the other 10 nations that will share the euro fear that a U.S. slowdown will hurt their prospects. Potential hot spots abound worldwide. If it's any comfort, central bankers are on the alert. But if things go wrong, we'll be counting on Greenspan & Co. just to get through another year.
By Mike McNamee in Washington, with Ian Katz in Sao Paulo, Thane Peterson in Frankfurt, and Brian Bremner in Tokyo RELATED ITEMS
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Updated Dec. 17, 1998 by bwwebmaster
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