Opinion pieces and speeches by EPI staff and associates.   

THIS PIECE APPEARED IN NEW YORK NEWSDAY ON NOVEMBER 4, 1998.

The risks of recession are rising. Consumer confidence is fading, the trade deficit is relentlessly expanding, and the stock market prices remain higher than profit margins justify. The recent surprise interest rate cut by the Federal Reserve suggests worry in high places, although the cut itself is too small to stop an unraveling economy. And the 4,000-page budget agreement Clinton just signed won't help either.

Business cycles are the price we pay for capitalism. But this is particularly dangerous time for the U.S. economy to turn down. As the President has said, we are facing the most serious economic crisis since the 1930s. The world's governments and central banks are struggling against a rising tide of financial instability that has already engulfed Asia and Russia, and is threatening to flood Latin America.

A healthy American economy is the world's last defense against a global depression. For one thing, we are the largest market in the world for countries who must export in order to gain the foreign currency necessary to climb out of their financial hole. For another, restoring business confidence in the world depends upon credible American leadership, which would be destroyed by a recession in the United States.

As a consequence of the politics of balancing the budget, the Administration and the Congress have left the management of growth up to the Federal Reserve, whose principle lever is manipulating interest rates. However, under the current extraordinary circumstances, lower interest rates are likely to be a necessary, but insufficient remedy. Once the contagion of deflated expectations takes hold, businesses and consumers typically do not revive their spirits just because the price of money becomes cheaper. At that point, economists often note, its like "pushing on a string." After all, interest rates close to zero have not helped to bring back the Japanese economy, any more than rock-bottom interest rates could get us out of the Great Depression.

What we need now is an infusion of net economic activity that will assure consumers that they can afford to spend and business that it makes sense to keep investing.

To do this, both Democrats and Republicans will have to shift to a policy of unbalancing the federal budget. It made sense to move to budget surplus, which withdraws money from the economy, when the private sector is expanding. But now that private spending is slowing down, the economy needs the public sector to reverse course and provide net new spending to compensate for the downturn in the private sector. Under present circumstances a modest deficit injection of $75 billion - one percent of our Gross Domestic Product - would be a reasonable insurance policy against an economic stall out.

There are two ways for Washington to move. One way is to reduce taxes the other is to increase spending. For the last few months, Republicans and Democrats have been sparring over the budget. Republicans have proposed a tax cut of $80 billion over five years - too small for a stimulus and too oriented to upper income taxpayers. The Democrats want to "save" the surplus in case it is needed to solve the gap in Social Security funding a couple of decades from now. This would involve paying down the national debt, which would depress the weakening economy and reduce tax revenues - and ultimately be self-defeating.

But the case for increasing government spending - if that spending is used to invest in making our people more productive - is greater. For the last decade, spending on education, training and programs to help workers adjust to lay-offs have been sacrificed to the effort to balance the budget. Once the fiscal deficit is eliminated, we were told, we could once again start investing in the future competitiveness of our people. In the meantime, these needs have been shortchanged. For example, the General Accounting Office has estimated that the nation needs over $100 billion more for physical upgrading of our schools - to fix leaking roofs, get the rats out of the basement, and rewire classrooms for computerized learning. But again, the Congress just turned down the president's modest request to make a down payment on that need.

A revival of public investment would also enable the federal government to target the funds at areas most vulnerable to an economic downturn - communities where manufacturing employment is already being cut and inner city areas with populations the last hired and the first fired.

Moreover, although tax cuts can be mobilized faster, government investment spending is more efficient in boosting the economy because virtually all of the money will be initially spent in the USA. In contrast, a large share of the additional dollars consumers now spend is going to imports.

Finally, unlike spending on consumption - private or public - investments in education and training would be well spent even if a recession does not occur. Like private investments for a house or business, it makes perfect sense to finance public investments which improve future economic growth and tax revenues.

Unfortunately, the increase of about $20 billion spending in the federal budget was too small to stimulate the economy and scattered over too many trivial projects to add up to much investment in the future. For example, almost half went to expand the Pentagon and CIA budgets.

In the early days of the Great Depression, President Herbert Hoover had a chance to inject spending into the economy, and, thus, to halt the downward spiraling of confidence. Obsessed with a balanced federal budget, he refused to act. It was the largest single economic policy blunder of the 20th century, and the world paid an enormous price for it. History will not look kindly on those who repeat that mistake.

[ POSTED TO VIEWPOINTS ON FEBRUARY 22 ]

Jeff Faux is the co-founder and president of EPI. His latest book is "The Party's Not Over: A New Vision for the Democrats."