Agriculture in the Macroeconomy: Discussion

The importance of macroeconomic and financial policies, domestic and international, for U.S. agriculture is becoming increasingly recognized. And there are significant feedbacks to the U.S. economy from agriculture. The trade account balance, investment, and the consumer price index are examples. This session was to evaluate these linkages more fully within an intermediate-term macroeconomic policy scenario. The COMGEM modeling system selected for the exercise is designed to consider simultaneously agriculture and the remainder of the economy. The Bosworth and Lawrence intermediate macroeconomic scenario is essentially more of the same. The budget deficit declines because as shares of gross national product (GNP), government expenditures fall, and government revenues remain constant. For 1988-90, real GNP growth rate is projected at 2.5%, the real prime interest rate at 5%, the rate of inflation at 4%, and the real exchange rate constant. Aside from the increase in inflation, these conditions are similar to those of the past two years (Penson and Gardner, table 1). Bosworth and Lawrence express reservations about these projections and the longerterm outlook. Their reasoning goes like this: consumption as a share of GNP is high relative to the past, and savings is low. The high level of consumption and an investment rate higher than the savings rate are being supported by borrowing in international capital markets. Expansionary macropolicies are contributing to the low rate of investment, high consumption rate, and inflow of foreign capital by requiring high real interest rates. These policies have resulted in a trade deficit, roughly the mirror image of the capital transfer required to sustain domestic consumption and investment at current levels, given the savings rate. The implications are for lower economic growth in the future and a domestic economy more exposed to shocks whether from the international markets, trade, or unfortunate choices of domestic policy. Bosworth and Lawrence question why the United States is pursuing this myopic policy. It is argued that the higher savings and lower consumption rates that should be stimulated by the high real interest rates are being offset by expansionary fiscal policy. They point to a lower rate of economic growth unless barriers to trade can be decreased, growth rates can be stimulated in foreign economies, or more conservative fiscal policies are adopted by the United States. The present economic management strategy is to stimulate trade through higher levels of economic growth in foreign countries and reform of international commodity markets. The level of exports cannot increase unless the level of imports increases, and imports are bei g squeezed out by high foreign borrowing. However, the force of history would suggest that policy initiatives to increase exports will meet with only modest success. The achievement of a more balanced relationship between consumption, savings, and investment will likely come from domestic policy action. A broader understanding of the savings, investment, consumption, trade, and current account relationships may result in pressures to alter domestic macro and financial policy. Another stimulus for policy change not mentioned by Bosworth and Lawrence is the uncertainty resulting from the current strategy for managing the economy. Fluctuating exchange rates, volatile financial markets, and reductions in investment all suggest greater uncertainty about the future of the economy. Public reaction to uncertainty about the economy ultimately may be more important than concerns about the more distant future in alternating macroeconomic and financial policy. While Bosworth and Lawrence provide a Stanley R. Johnson is a professor of economics and administrator of the Center for Agricultural and Rural Development, Iowa State University.