|September 24, 2001 /L.A. TIMES
Commentary/Economic Slide Makes Spending Respectable
By ROBERT POLLIN, Robert Pollin is a professor of economics and codirector
of the Political Economy Research Institute at the University of
U.S. economic policymakers have failed for almost a year to respond
adequately to the looming global recession.
The calamitous events of Sept. 11 certainly strengthen the recessionary
forces. But they have also made the solution to the recession--large-scale
injections of government spending, even if the federal surplus
evaporates--both obvious and politically irresistible.
Federal Reserve Chairman Alan Greenspan has cut short-term interest rates
eight times this year, bringing rates down from 6.5% to an eight-year low
of 3%. But unemployment jumped from 4.4% to 4.9% in August, consumer
confidence was at an eight-year low, and the stock market had been falling
broadly for nearly two years. Conditions in Japan, Europe and most
developing economies were at least as bad. Greenspan's interest rate cut
last week sought to encourage the stock market once it reopened after the
terrorist attacks. But the Dow Jones index still fell by 7% Monday, and the
other indexes experienced similarly sharp declines. The market kept
tumbling all week, suffering its largest one-week drop since the Depression.
The rampaging stock market had been the economy's primary growth engine for
most of the 1990s. But this pattern was unsustainable because it encouraged
both businesses and households to borrow heavily to finance investment and
Private-sector debt burdens thus became severe when the market bubble burst
18 months ago. This has weakened any positive impact of Greenspan's
interest rate cuts.
The $300 rebate checks households are receiving barely register against
such destabilizing financial forces.
Still, before Sept. 11, the largest obstacle to countering the recession
was the completely unfounded belief that the federal government's surplus
was the bedrock of prosperity that had to be guarded, even in a recession.
When the government runs a surplus, this means it is collecting more in tax
dollars than it is injecting into the economy as spending. But increased
government spending--to hire workers and buy products already sitting on
businesses' shelves--is precisely what is needed to fight a recession as
private-sector spending slumps.
The Sept. 11 calamity has finally made increased government spending
politically respectable, even if it means moving the non-Social Security
federal budget into a deficit.
On Sept. 14, Congress committed $40 billion for disaster relief,
reconstruction, increased transportation security and countering terrorism.
Senate Majority Leader Tom Daschle (D-S.D.) said this amount was just a
"minimal down payment" to what will be required.
Even if we were to rapidly inject $200 billion--combining a wider range of
government spending and immediate cuts in payroll deductions--it would
directly increase national spending by only about 2%. But such an injection
would also bring positive ripple effects: benefiting the airlines and other
severely damaged industries, encouraging firms to avoid layoffs and
counteracting the declines in households' incomes. Equally important
benefits will flow to other countries that depend heavily on selling their
exports in the U.S. market.
By contrast, the Republican proposal to cut capital gains taxes provides no
such benefits. This simply increases the after-tax reward for selling
stocks and bonds at a profit, which is more likely to encourage a new round
of stock market speculation than increase new private sector investments in
capital equipment. Just as with this year's initial Bush tax cut, it will
also reduce the revenues available to the government to pursue an effective
post-Sept. 11 spending program while redistributing income to the wealthy.
Of course, the controversy over increased government spending concerns
whether the funds will be used effectively. One standard appropriate to the
recent attacks would seem clear: to use government funds to protect
innocent people everywhere from further terrorist attacks as well as
self-defeating cycles of violent reprisals.
Increasing government spending is no magic bullet. But it will be a force
for good by reducing the spread of unemployment, poverty and social despair
that would accompany a severe global recession.