If one steps back from current economic concerns and looks ahead several years, the outlook for the U.S. and world economies can appear very bright. A capital-goods boom can be foreseen on a worldwide basis.
The emerging momentum for growth in the developing countries of Asia and Latin America should be well sustained.
These countries are now seeking to develop with less direct involvement of government and therefore fewer uneconomic subsidies.
Moreover, there has come to be greater appreciation for the value of a stable financial environment undisturbed by rampant inflationary pressures.
Sooner or later, the evolving economic and political systems of the countries of eastern Europe and the former Soviet Union will also show more signs of stability.
Capital Goods in the Picture
While the minimum consumption needs of the populace will have to be met in the short run, these countries will become viable and stable entities over the long run only to the extent they can use resources to enhance their domestic productive capacity.
That means increased demand for capital goods - a demand that will be enlarged by the need to correct past investment mistakes.
If these growing demands from emerging countries are put together with the prospective end of economic slumps in major industries countries, the world's growth potential as the 1990s progress can be viewed quite optimistically.
Moreover, through expansion in exports, the United States is well positioned to benefit from the strong world economy.
Our manufacturing industry - and particularly the capital-goods sector -- now competes very effectively on international markets.
Such an optimistic longer-run outlook for the world economy and the United States contrasts rather noticeably with the current downbeat economic sentiment in much of the industrialized world.
Obviously, the problem is that the major countries are now caught in economic slumps, some quite protracted. And in the united States the wisdom and will of governmental policy-makers is in question for a number of other reasons as well.
At some point in the future the current situation will be seen as transitional.
For several years now, the major countries have been holding back their economies largely through monetary restraint, in an effort - generally successful - to reduce inflation.
Once the countries let up on these policies, the underlying growth propensities in the world should be more fully realized.
The basic issue in that respect is how low a rate of inflation is satisfactory. If the countries persist in reducing inflation even further, the transition period will be long.
But if there is agreement that inflationary pressures are now adequately subdued, the transition will be shorter.
Expansionary U.S. Policy
In the United States, the Federal Reserve has been running a fairly expansionary monetary policy since late last year, as judged from growth in the narrow money supply (M1) and from the steep yield curve.
The U.S. economy has been generally sluggish, but there has been a modest acceleration in growth so far this year.
While continued weakness in the broader measure of money (M2) might indicate that policy needs to be expansionary, the economic significance of the aggregate has been reduced by ongoing institutional changes.
Whether U.S. monetary policy should be adjusted further will have to be resolved by incoming economic data.
It is much clearer that monetary policies in western Europe and Japan remain generally restrictive -- oriented to reducing price pressures rather than encouraging growth.
A Penny Saved
But in most countries inflation has been pretty well subdued. Those countries may be able to do more than the United States at this point to hasten the transition toward more growth-oriented monetary policies.
Once liquidity growth is less constrained by the monetary authorities, we should begin to see a relatively strong performance by the world economy, fueled over time by the demand for capital goods.
But how strong a growth and at what level of market interest rates will depend in part on how much people are willing to save.
When we reach that stage, it would serve us all well if the United States got its chronic budget deficit under control. In addition, it would be desirable if the upward creeping of the deficit in the other Group of Seven countries thus far this decade were halted or reversed.