Can the U.S. continue to flex its economic muscles? Are burgeoning budget deficits, national security overruns, burdensome government regulations, Medicare funding woes, and stiff global competition endangering America's powerhouse status?

• Author: Weidenbaum, Murray L.
• Position: National Affairs

THE PRESIDENTIAL ELECTION campaign hits started early. That usually is a bad time for any serious discussion of public policy. Before we get caught in the campaign crossfire, however, let us examine the serious economic questions facing the American people. We may yet be pleasantly surprised by a candidate willing to deal with some of the tough issues. In any event, these problems will still be here after the polls close on that fateful Tuesday in November, 2004.

Whoever is inaugurated as president in January, 2005, Republican or Democrat, will face seven key questions of economic policy: (1) In what ways can the U.S. achieve a stronger economy? (2) How can the nation avoid inflation as well as deflation? (3) What action should be taken when the temporary tax cuts expire? (4) Arce there ways to finance Social Security and Medicare when the baby boomers retire? (5) How is rapidly expanding government regulation to be dealt with? (6) Can the U.S. meet global competitive challenges, especially from China and India? (7) How are future threats to national security to be handled?

A stronger economy. Although the American economy is not exactly booming, an upturn is underway. Indicators rose by about 21/2% this year. Three rounds of tax cuts and quadruple that number of interest rate reductions have provided substantial stimulus. A drop in the international exchange rate of the dollar is encouraging exports. The continued upturn in military procurement is another boost. Coincidentally, my rubber band theory of business cycles seems to be working well--at least better than the more formal econometric models. Sharp and long recessions generate big snapbacks. Mild recessions, however; usually are followed by shallow recoveries since there is no opportunity for the accumulation of large backlogs of unmet business and consumer demands. Surely, this is the current experience. The result is a slow and drawn out recovery.

Policymakers in Washington should let the economic medicine do its work and not overdose the patient. Politicians always want to show the public how active they are. Now, however, they would be well advised to take an economic form of the physicians' Hippocratic Oath: first pledge to do no harm. The summer of 2003 provided a good reminder of the need for a moderate economic policy. When the new higher budget deficit numbers were published, interest rates began to rise. Additional Federal spending programs, designed to prod recovery, could have further adverse economic effects--especially if they lead to interest rate increases.

Americans must get used to the fact that this is a very different economic climate from the 1990s, That was an unsustainable boom time. The financial future probably will be more modest than the feverish pace of the last 10 years. It is unlikely that the coming decade will see economic growth of well over four percent three straight years, as we experienced in the late 1990s. Fortunes will not be made as frequently, nor lost as quickly, in this new and more resourceful economic environment.

Many people, however, are suspicious of any report that the economy is turning up, whatever the rate, as long as unemployment stays high. A little lesson in economics may be in order. This country's population is growing by about one percent a year. Thanks to rising productivity, the average worker produces around two percent more per annum, That means that the economy has to glow by three percent just to keep unemployment steady. The unemployment rate declines only when the economy is expanding faster than that, which is why, earlier this year, while the economy was growing slowly, joblessness was edging up.

Inflation and deflation. In recent years, the U.S. has avoided the economic extremes of inflation and deflation. Of course, some individual expenditures--especially of services--continue to rise even when the economy is weak. Meanwhile, the cost of other items, mainly...