Jump-starting the economy

John Kenneth Galbraith

May 29, 1991|By John Kenneth Galbraith

I CANNOT but marvel on encountering an issue of major popular concern on which, as now, there is a broad unity as to response.

That issue is the recession and what to do about it.

The truly complete agreement by all levels of government is on measures designed to make it worse.

Everywhere across the country governments are tightening budgets, curtailing services, reducing payrolls, furloughing workers -- or promising to do so.

Individuals immediately affected, needless to say, have their spending -- and resulting support to the economy -- promptly reduced.

Many under threat of unemployment are impelled to retrench.

So also are those in receipt of welfare and other payments now being curtailed or threatened with curtailment.

President Bush and numerous official and volunteer spokesmen have advised that the recession will be shallow and brief.

The third or fourth or some slightly later quarter will see the automatic recovery.

Better home sales and the small improvement in retail sales announced last week surely point the way.

All those who so speak should be regarded with skepticism. They divide between those who do not know and those who do not know they do not know.

Similarly suspect are those who speak confidently of the magic of monetary action, the therapeutic marvel of a modest reduction in interest rates.

On all of this, there are warnings from the past. So many optimistic predictions were made in the early months of the Depression that Simeon D. Fess, chairman of the Republican National Committee, was led to suspect an exceptionally devious plot to discredit Herbert Hoover's administration.

"Every time an administration official gives out an optimistic statement about business conditions, the market immediately drops," he said.

It is better and safer that all levels of government reverse course and unite in making things better.

Accepting the conservative conviction that recessions are soon over, let us have short-run borrowing to sustain services and thus to cover the recession-induced shortfall in revenues. Then if automatic recovery is not assumed, this becomes even more important.

If there are constitutional barriers to borrowing, let there be steps to have them relaxed temporarily.

More important, let the federal government, from its far greater fiscal resources, now establish a special fund, a latter-day Reconstruction Finance Corporation, with borrowing power on a scale in keeping with the savings and loan bailout.

There is something bizarre in an "education president" urging educational reform when school districts are curtailing the school term, freezing or cutting teachers' pay and, in some extreme cases, threatening to close schools for lack of money.

The financing corporation should invest in repair and improvement of roads and bridges, urban transport facilities, airports and other, as it is called, infrastructure.

We are now seeking through lower interest rates to encourage private investment; why not proceed with greatly needed public investment?

As a bow to fiscal conservatism, perhaps we should have a higher-bracket tax increase to cover interest and amortization on the borrowing by this corporation.

The expansive effect of the large immediate expenditure would far offset the small restraining effect of the more enduring tax.

The important things is to get all levels of government off their present deflationary track. They are supposed to be the guardians of the public well-being. Presently, they are united in making it worse.

John Kenneth Galbraith is emeritus professor of economics at Harvard.

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