THE COMING recession is likely to be deeper and more difficult to surmount than any in recent memory. And the policies being contemplated in the usual circles will only make it worse.
The recession will be a doozy for several reasons. First, it is coming at a time when the U.S. economy is weak to begin with. Normally, banks thrive during a recovery, which allows them to withstand loan losses in a recession. This time, the entire financial sector goes into the recession shakier than at any time during the postwar era.
Second, the recession comes at a moment when neither of the usual anti-recession medicines -- deficit spending or loose money -- are available. Congress is attempting to reduce the deficit, and the Federal Reserve is talking about tighter money to damp down inflationary pressures.
Third, the economic recovery of the 1980s was not built on real advances in productivity. It was built on debt.
Fourth, our foreign lenders -- Germany and Japan, which financed all that borrowing during the merry '80s -- suddenly have other calls on their money. West Germany is sending most of its spare deutsche marks eastward, and Japan is having internal problems keeping its over-leveraged financial and real-estate markets from collapsing.
During the mid-1980s, foreigners lent the United States an average of $80 billion a year. In the first six months of 1990, there was a net outflow of foreign capital of over $20 billion from the United States.
And finally, the doubling of the price of oil will administer the coup de grace and create stagflation -- higher prices as well as recession.
All this would be serious enough even if policymakers were not mired in the same stale assumptions that seem to preclude any solution. The conventional remedies of tighter money and a smaller deficit will only push the economy deeper into recession.
Even on the energy front, it seems to be business as usual. With unerring timing, the Senate on Sept. 26 failed to muster the votes to break a filibuster against the proposal by Sen. Richard Bryan, D-Nev., to require a fleet-average fuel economy of 40 miles per gallon by 2001.
With the usual remedies precluded, what kind of policies could get the economy out of recession? Here are some policies currently unfashionable, but worth reviving and pursuing:
* Massive public investment. In the 1980s, the U.S. rate of public investment fell to less than half its historic average -- everything from roads and bridges to schools, airports, water and sewer lines, parks, dams and federal research and development outlays.
Economist David Aschauer, in a series of studies, found a high correlation between the rate of public investment and the productivity growth of the private economy. Unlike supply-side policies aimed at giving wealthy individuals more tax relief, some of which is consumed rather than invested, public-works spending generates investment of 100 cents on the dollar. And stimulation of the economy via public works has the further virtue of staying almost entirely in the United States, while private consumption partly "leaks" into the purchase of imports.
It is ironic that one of the U.S. negotiating demands in our trade talks with the Japanese has been that Japan should significantly increase its own public-works spending. The idea is that this would stimulate Japan's economy, and that a few additional crumbs might fall to U.S. exporters. This is an epic case of do-as-I-say, not-as-I-do.
* An incomes policy. At other times and in other countries, many economists have argued that a social contract is a constructive alternative to fighting inflation with recession. The usual worry is that stimulus of the economy creates labor shortages, which in turn creates wage increases in excess of real productivity growth -- and price inflation.
The alternative is a compact to ensure that wages don't outrun productivity growth. Lately, this view has been hopelessly out of fashion. The invisible hand of the free market is supposed to solve these problems.
But the coming recession was administered with the helping hand of the Federal Reserve, the Bush and Reagan budget office, the deregulation of the savings-and-loan industry and the debt legacy of supply-side economics. Bad policy got us into this mess; good policy is needed to get us out.
nTC * Progressive taxes. The great American middle class lost real income during the 1980s. If public investment is to be restored, the principle of progressive taxation must be restored, too. The income groups that benefited from the supply-side experiment should pay the bill.
Not very long ago, these ideas and others like them formed the essence of American progressivism. In the 1980s, conservatives reigned. Many liberals dove for cover and -- in their embrace of deregulation, privatization and tax relief for the rich -- tried to sound more like conservatives.
Nothing fails like failure. The thud of recession should signal the failure of the supply-side experiment. And the opposition should be ready with a program of relief, built on different theories and different values. Otherwise, the blame will be diffused, alternatives foreclosed, and the pain prolonged.
Robert Kuttner writes regularly on economics.