In the economic morass -- again

Leonard Silk

November 18, 1991|By Leonard Silk

GET OUR economy moving again, President Bush said last week, echoing the theme of John F. Kennedy's successful campaign against Richard M. Nixon in 1960. Nixon blamed his defeat on the Eisenhower administration's failure to take strong enough action to wipe out the recession.

A myth exists that Kennedy, soon after he took over the White House, swiftly delivered on his pledge to get the country moving again by a big tax cut.

Actually, Kennedy was slow. Although the economy began to recover a month after he took office, the unemployment rate, which had been 5.6 percent in 1960, rose to 6.7 percent in 1961 and held at 5.6 percent in 1962 and 5.7 percent in 1963.

Kennedy finally accepted the advice of his economic advisers, headed by Walter W. Heller, and began to campaign for a big tax cut in 1963. He was assassinated before Congress acted on the proposal.

President Lyndon B. Johnson pushed the $14 billion tax cut through in 1964, and the economy surged. But the Vietnam buildup thrust it into inflation, which the 1967 tax increase was too late to prevent.

When Nixon gained the presidency after beating Hubert H. Humphrey in 1968, he sought to stop the inflation with a policy of "gradualism," relying on the Federal Reserve to keep the money supply -- and the economy -- growing slowly.

But recession struck in 1971, and Nixon, worried about the 1972 election, pressed the Fed to jazz up the money supply. He also threw in tax cuts, spending increases and a devalued dollar to drive the economy up and price and wage controls to hold the inflation down.

In 1972, Nixon was re-elected in a landslide over George McGovern. But after the election, with price controls lifted, inflation broke out.

The political business cycle rolls on and on. With the elections earlier this month demonstrating voters' anger over the stagnating economy, the old issue is back with a bang for 1992: How to stimulate economic growth without germinating inflation or other economic ills?

Here are the main policy options:

* Monetary policy: With chronic budget deficits having swollen the national debt by over $2.5 trillion during the Reagan and Bush years, and fiscal policy tightly constrained, monetary policy has looked like the only wheel in town. The Bush administration has been leaning on the Fed for easier money and credit. Short-term interest rates are down a lot, long-term rates much less. The money supply has grown sluggishly, and so has the economy.

Some economists think that thanks to the enormous hangover of public and private debt, and business and consumer confidence impaired, monetary policy is not working. The air is full of gloomy metaphors: Monetary policy is "pushing on a string," "driving into a 50-mile-an-hour head wind," "caught in a liquidity trap." But most economists -- including those around Bush -- still insist easier money will work, in time for the election.

* Fiscal policy: Supply-siders are still calling for tax cuts. Anti-supply-siders say the big Reagan tax cut of 1981, which was turned into a Christmas tree with the help of Democrats, is the root of the economy's ills, undermining savings, investment and productivity growth.

Bush has taken a hesitant line on tax cuts, because of the huge budget deficit and the budget agreement -- to the loud annoyance of the supply-siders. But he has urged Congress to enact "IRAs that are tailored to boost home ownership," "enterprise zones to spawn a new generation of urban entrepreneurs" -- and a capital gains tax cut.

"I believe if it could be done without getting a lot of baggage on it coming out of the Congress," he said, it "would unleash investment and get our economy moving again."

* Cheerleading and jawboning: Some critics of Bush say he should be restoring business and consumer confidence by acting more like Reagan. Bush has, in fact, been jawboning the banks to cut interest rates on credit cards, urging regulators to take it easy on the banks, coaxing business and consumers to cheer up.

* Benefits for the hard-hit: Bush has decided to work with the Democrats for an extension of unemployment benefits without breaking the budget agreement.

* Restructuring national priorities: The end of the Cold War and virtual disappearance of the Soviet military threat open up the possibility of a bigger "peace dividend" -- either a bigger cut in the deficit that would reduce capital costs and spur investment or new civilian programs to improve "human capital," increase investment in technology, raise productivity and clean up the environment.

Cutting wasteful "entitlements" or inefficient and costly health-care policies could make funds available to augment economic growth and raise living standards. But such shifts in national priorities would take years to carry out, and would be opposed by strong interest groups.

Yet a serious effort to tackle the nation's long-term social and economic problems could have a short-run electoral payoff for the candidate who could articulate it.

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