TIME: Almanac 1993/TIME Almanac 1993.iso/time/011392/0113202.000

Text File | 1992-08-28 | 12.1 KB | 242 lines

                                                                                BUSINESS, Page  39

COVER STORIES

A Quick Fix Is Not Enough


Tax cuts may produce a spark, but the economy needs long-term
fuel. Why not a New Deal for the '90s?

By BARBARA RUDOLPH -- With reporting by Laurence I. Barrett and
Dan Goodgame/Washington


    This recession is different. That is the raw,
uncomfortable reality that more and more Americans seem to know
and feel, from university economists in Massachusetts to
shipyard machinists on the Mississippi coast. Many Americans
sense that the classic cures for a garden-variety recession --
tinkering with the tax code, boosting spending programs or
simply waiting for the business cycle to run its course -- may
not be enough to restore lasting prosperity this time around.
In fact, the U.S. economy needs more than a quick fix.
Substantial, structural changes may be required. It may even be
time, some economists are suggesting, for a new version of the
New Deal.

    Few would advocate a literal reprise of Franklin D.
Roosevelt's response to the Great Depression, which included
strong gusts of government spending and massive public-works
projects. Most economists shy away from any agenda that would
increase federal bureaucracy or require more direct, activist
government intervention in the marketplace.

    Yet the U.S. economy stands at an important crossroads.
"This is the time to take major steps and make major changes,"
says Allen Sinai, chief economist of Boston Co. Economic
Advisors. "The economy is beset by structural, long-run problems
that cry out for a systematic plan of attack. The time has come
to create a new economic order." Robert Heilbroner, an
economist at the New School for Social Research, argues that the
1990s should mark the start of a new era. The U.S. economy, he
says, could be poised for a new "long wave" of growth, following
the most recent wave that began after the World War II era and
continued more or less through the 1980s.

    Each economist carries his doctor's bag of pills and
potions for the ailing economy, but there is a strong consensus
on the need for one dose of medicine: a dramatically improved
infrastructure and educational system. Capital investment for
roads, bridges, highways and airports is essential for the
long-term health of the American economy. Serious repairs of the
nation's transportation system have been postponed, and the
evidence can be seen in crumbling bridges and congested highways
everywhere. During the past 30 years, infrastructure projects
have declined from 3.2% of total U.S. spending to 1.6% today.

    In a TIME/CNN poll conducted Jan. 2, a majority advocated
such economic remedies as middle-class tax relief, favored by
78%, and a cut in the tax on capital gains, endorsed by 55%.
But most also want long-term solutions, including greater
spending on education, which 82% support, and increased spending
on highways, roads and bridges, which 57% advocate. To finance
such projects, 68% want an increase in taxes on households with
incomes of $100,000 or more, and 67% favor an increase in taxes
on alcohol and tobacco. Only 22% would accept a higher gasoline
tax.

    Since this is an election year, the quick and relatively
easy economic fixes are bound to take precedence over the more
worthwhile but cumbersome long-term reforms. When President Bush
unveils some specific growth-stimulating proposals in his State
of the Union address at the end of the month, the centerpiece
will probably be a capital-gains tax cut. Such a cut would do
the economy the most good if it were directly aimed at
stimulating new investment. Democrats may accept a capital-gains
cut in a compromise deal if it is joined with some sort of break
for lower-and middle-income taxpayers, since it is the wealthy
who benefit most from capital-gains relief. Congress may revive
the investment tax credit in hopes of boosting spending on
factories and equipment. Bush would probably sign on. Experts
caution that the ITC would be truly helpful only if the credit
is temporary (somehow temporary measures tend to become
permanent by default) and targeted to productive investments.

    Several Democrats and Republicans advocate a sharp cut in
the payroll tax for Social Security and Medicare. This
regressive tax has nearly doubled in the past decade to 15.3%,
with the burden shared equally by employer and employee, and of
all the taxes that the Treasury collects, it may be the
strongest deterrent to the creation of new jobs.

    If properly focused, these measures could be sensible and
even effective. But they are little more than cosmetic surgery
-- a nip here, a tuck there. What the U.S. economy desperately
needs, many experts now argue, is the equivalent of open-heart
surgery. The key to the economic transformation: basic
investment in capital improvements and not in consumption. The
notion would be to rebuild a public environment in which
businesses could flourish. In this way, America's waning
competitiveness in global markets might be restored.

    To resurrect the American infrastructure, the government
might help finance federal, state and local partnerships to
build mass transit, opting for light rail more often than
underground subway lines. These transit systems would easily pay
back their start-up costs through reduced consumption of fossil
fuels, diminished pollution and traffic congestion. The
construction could be financed, at least in part, by new taxes
on parking and gasoline. Similarly, high-speed railcars could
be a new, more efficient means of transportation and could be
paid for by imposing new taxes on diesel and jet fuel. Those
levies would not be popular -- but that is what leadership is
for.

    This ambitious undertaking would certainly provide an
immediate lift to the economy, no bad thing when the general
prognosis is for anemic growth through the middle of the decade.
In the long run, the economy's basic foundation would get a
second life. "The economy needs a shot in the arm, and these
things need to be done," says economic forecaster David Levy.

    As part of any new boost to capital investment, the
Federal Government will have to spend more to stimulate private
research and development into new technologies. The President's
proposed budget for basic research in fiscal 1992 was 8% greater
than funds allocated in 1991, but is still paltry by comparison
with defense R.-and-D. spending. As Americans have been
skimping on R.-and-D. projects, their foreign rivals have been
boosting outlays and reaping the rewards. U.S. spending on
nondefense R. and D. has amounted to less than 2% of GNP, vs.
nearly 3% in Japan.

    The American public-education system gets equally dismal
grades when compared with much of Europe's and Japan's.
Harvard's Robert Reich and other economists contend that in the
next decade, the skills of a country's work force will be a
major determinant of its competitiveness in the world. Some
experts argue that all who qualify academically should have
access to a college or a vocational-training program, even if
they lack the money for tuition. Arkansas Governor Bill Clinton
suggests that needy students could pay for their education by
performing some kind of public service after they graduate or
by repaying loans through modest payroll deductions over many
years.

    Where, the skeptics ask, will the money come from? At
least some of the billions must come from the old cold war
defense budget. Some economists think the Pentagon could
eventually provide $50 billion in defense savings a year, beyond
those that have already been budgeted. Internal Pentagon reports
conclude that such a cut would not endanger national security.
Last week congressional leaders called for elimination of the
legal barriers between military and domestic spending, which
would make it easier for Congress to use Pentagon cutbacks for
other federal programs. A defense windfall, some economists say,
should be used to repair the nation's infrastructure. Heilbroner
quips that the defense contractor Northrop could be transformed
into the North American Road Corp.

    But if infrastructure projects are to get further than a
contractor's sketch pad and the economy is to be permanently
transformed, not just temporarily revived, a long period of low
interest rates is essential. For that reason, the overwhelming
majority of economists argue that the Federal Reserve must keep
the discount rate near its current 27-year low of 3.5%. Still,
the central bank can do only so much. Since the bond market
remains quite wary of a ballooning federal deficit -- and would
undoubtedly drive up interest rates in anticipation of
dramatically rising deficits -- Congress will have to keep a
constant eye on the mood of the markets to prevent interest
rates from spiking up.

    Several of the President's economic advisers believe a
sizable deficit financed stimulus program would not drive up
interest rates significantly, so long as the caps on future
federal spending are kept in place, as agreed in the 1990 budget
deal. Michael Boskin, chairman of the President's Council of
Economic Advisers, has argued in White House meetings that
although the Federal Government already expects to run a $360
billion deficit this year, U.S. fiscal policy is essentially
neutral because almost all the deficit is accounted for by
interest payments on the federal debt and by the cost of bailing
out depositors in failed banks and thrifts. Neither of these
payments has any stimulative effect. Meanwhile, the states and
cities are running contractionist fiscal policies by raising
taxes and cutting spending. If caps on future federal spending
are kept in place, Boskin has told his colleagues, the economy
could benefit from stimulative tax cuts of about 1% of economic
output, or about $57 billion, without driving up long-term
interest rates more than half a point.

    In an approach that frankly apes the New Deal, Iowa
Senator Tom Harkin goes even further and proposes massive
investment in public works. His rhetoric is plainly
Rooseveltian: one of his stock speeches aims to evoke 1930s
nostalgia by recalling how Harkin's father, an unemployed coal
miner, got a job working on a WPA construction site.

    In response to such echoes of New Deal policies, some
economists point out that the New Deal focused squarely, and
sensibly, on dragging the economy out of its nightmare. The goal
was essential, but it was a decidedly short-term fix. Roosevelt
launched heavy government spending, priming the pump to mitigate
the drastic economic contraction. Some economists argue too that
in a sense the New Deal was an incomplete economic success. In
1940 the unemployment rate had been more than halved -- but
still stood at about 14%. Not until World War II did the economy
reach virtually full employment.

    Even the staunchest proponents of a 1990s New Deal admit
that their schemes have one real risk: an outbreak of
inflation. "That's the one big hitch," concedes Heilbroner. He
adds, though, that if the U.S. had its own type of loose
alliance between labor, business and government, as some
European nations do, such a structure could provide a means to
control excessive wage increases. But most Americans would
oppose that kind of state involvement in the marketplace.

    Americans have always been good at muddling through.
Defining a course of bold action -- and finding the political
will to make the first move -- is inevitably more difficult. But
the pervasive pessimism that seems to define the American
spirit today is itself a cause for optimism. People are worried
-- and that may mean they are finally ready to accept tough
measures and discomfort. "I am more encouraged now than I've
been in a long time," says Sinai, in marked incongruence to his
words of warning. "The country is waking up to the fact that
we're in deep trouble. That's the first step." The long-term
goal seems clear: a fundamental overhaul of the basic
structure, the capital core, of the U.S. economy.