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Top of the News: Commentary
YES, SPUR THE ECONOMY WITH PUBLIC SPENDING
Worried about your job? You should be. For the past three years, economic growth in the U.S. has averaged a mere 0.4% annually. The economy is mired in the longest period of stagnation since before World War II, despite two dozen interest-rate cuts by the Federal Reserve. And America's trading partners in Canada, Japan, and Europe are in slumps of their own. No wonder businesses, from banks to computer makers, are running scared. So are their workers, knowing full well that real wage gains are almost nonexistent, while job losses are mounting.
It's a dire picture. Worse yet, conventional wisdom holds that there is little Washington can do, because of the federal government's $310 billion budget deficit. Fiscal stimulus, the pundits say, would backfire badly by stoking inflation fears and sending interest rates sky-high. Better to sit tight, they urge, and do nothing more than urge the Fed to cut short-term interest rates. Hard times are here until households, businesses, and banks rebuild their tattered finances and regain their shattered confidence.
Nonsense. Of course, reducing the federal budget deficit is a desirable long-term goal. But the 1930s showed that without concerted government action, an economy can stagnate for years with growth and employment at very low levels. Is it worth risking a latter-day replay of those conditions for the sake of fiscal orthodoxy? The deficit certainly didn't stop President Bush from asking Congress for an additional $7.6 billion to help out Hurricane Andrew's victims. What this economy needs is a disaster relief package of its own. And Washington can deliver it, with measures to raise private and public investment.
Specifically, the government should restore the investment tax credit for equipment and machinery, a powerful lever for boosting private-sector investment. Washington should also give money to local governments to hike public investment. Both steps could have an almost immediate impact. Chris Varvares, an economist at Laurence H. Meyer & Associates, estimates that a modest $25 billion fiscal package would add about 1% to gross domestic product growth while creating nearly a million jobs over the next 12 months.
A controversial solution? Maybe, but it's one recently advocated by 100 high-powered economists, who called for $50 billion in federal assistance to state and local governments. Even normally conservative chief executives say it might be time to spend. "I would certainly put some money in rebuilding the infrastructure and try to jump-start the economy," says Martin D. "Skip" Walker, chief executive at M. A. Hanna Co., a maker and distributor of plastics and other products. "Realistically, it's something we should have done a couple of years ago, but better late than never."
It is investment spending, emphasizes New York-based economic consultant Peter L. Bernstein, that creates growth and lifts productivity. And investment spurred by a tax credit could have a strong impact on long-term economic growth. A study conducted by J. Bradford De Long of Harvard University and Lawrence H. Summers, chief economist at the World Bank, suggests that each extra percentage point of total output invested in machinery and equipment is associated with an increase of about one-quarter point a year in economic growth.
APOCALYPSE NOT. Public investment is just as crucial to growth. Good roads and airports lower the cost of doing business, and the U.S. needs to refurbish its highways, bridges, and school buildings. Infrastructure spending is "a way to invest in the future and still get lots of jobs right now," says David A. Wyss, economist at DRI/McGraw-Hill.
Get real, reply the proponents of do-nothingism. The bond market won't tolerate any such stimulus. But this fear may be way overblown. Disinflation, not inflation, is a powerful trend both here and abroad. Asset values are falling, companies can't raise prices, and wages are stagnant. There is also a surfeit of industrial capacity around the world, hardly fertile ground for inflation.
Some money managers agree. If there were an investment-oriented, as opposed to a consumption-driven, fiscal package, "there might be some initial bond market reaction but nothing serious," says Andrew H. Massie, managing director at Warburg, Pincus Counselors Inc. Interest rates would rise by about a quarter of a point or so, he says, which is far from the apocalypse.
These days, consumers and businesses are deeply worried, and government is hampered by too much prudence. It's well worth the budget risk to quickly stimulate the economy and restore the possibility of prosperity.Christopher Farrell