Recovery is possible without great pain

Robert Kuttner

January 29, 1992|By Robert Kuttner

THE HERD instinct in the press, always troublesome, is particularly hazardous in election years. A candidate is dubbed the presumptive front-runner, and the ensuing media attention helps create a bandwagon effect. Another candidate is pronounced as less than telegenic, and he is written off. The press decides that a third candidate is vulnerable to rumors about womanizing, and that abruptly becomes his issue.

The press also plays follow-the-leader in how it frames election-year policy issues and tests of candidate soundness. And this can be even more damaging. Take, for example, the economy.

Respectable media opinion seems to have decided that what the economy needs is more pain. It then logically follows that any candidate who denies the need for more pain is an opportunist or a scoundrel.

This conventional media wisdom was splendidly captured in the article by political writer David E. Rosenbaum that led page one of the New York Times for Jan. 18. The Times story, headlined "Democrats Vying in '92 Race Offer Painless Recovery," faulted the Democrats for promoting an economic recovery without acknowledging "that some bitter medicine might be necessary now to guarantee a healthy economy in the long run."

The story relied heavily on the expert views of two conservative Democrats, Ted Van Dyk, a consultant, and Charles Schultze, formerly Jimmy Carter's chief economic adviser. Both men are noted for their insistence that the economy can deflate its way to recovery by balancing the budget.

Correspondent Rosenbaum suggested that Democrats, scorched by memory of the bad-news candidacies of Walter Mondale in 1984 and Michael Dukakis in 1988, are now cynically "taking their cue from the successful scripts of Ronald Reagan and George Bush," and promising an improbable painless cure. The only Democrat exempted from this criticism was Paul Tsongas, who advocates greater fiscal discipline.

This view that economic recovery requires pain is pervasive in the press. Unfortunately, it is based on dubious economics.

This recession is unlike others of the postwar era, because the economy is in a deflationary downward spiral. For the first time since the Great Depression, real spendable incomes have fallen for a majority of households. The value of real assets is falling, too. In this environment, the burden of past debts begins to overwhelm the ability of businesses to turn a profit. That causes asset values, incomes and purchasing power to fall further.

All of this results in a paradox and a trap. While deficits that financed consumption helped put the economy into this fix, simply reducing the deficit by cutting spending or raising taxes will not cure the problem. It would only reduce purchasing power and inhibit growth.

By the same token, offering industry tax breaks, or incentives to increase private savings, will not power a recovery via investment; when industry sees few customers it seldom invests. Higher savings rates during a deflationary downturn only serve to reduce consumption -- which then means fewer customers.

Thus, the usual "cures" recommended by the usual suspects in the press and the economics profession -- reducing the deficit, raising taxes on the middle class, increasing savings rates -- are not just bad politics; they are perverse economics. These supposed cures would only dig the economy a deeper hole.

The one available way to propel this kind of economy into a real recovery is the same way that the Great Depression finally ended in 1941 and 1942: Government stimulates investment directly through its own capital spending and through contracts with private industry. This does an end-run around industry's reluctance to commit private funds to investments during a deflationary recession. This strategy generates economic activity and raises the value of assets, which then helps to make banks whole, which then restores credit.

This approach is not totally painless -- it would require tax increases on wealthy households. For example, restoring the 1977 tax schedule on the top 1 percent of Americans -- average household income, $676,000 a year -- would increase revenues by $76 billion a year, according to Congressional Budget Office data. But this recovery program would not require more economic pain for the vast majority of Americans, who have been experiencing real economic distress for more than a decade. The fact that most Democrats in the field are rejecting painful cures is an overdue sign of political and economic sanity, not opportunism.

If we in the press want to criticize the economic proposals of the VTC Democratic candidates, we should fault most of them for being too timid. For example, the economic policy paper of Gov. Bill Clinton, while offering sensible long-term proposals on education, training, tax equity and military conversion, is feeble when it comes to generating a recovery.

Clinton's four proposals are to "front-load" the highway program, which he says would create 200,000 jobs (against 8 million unemployed); minor changes in FHA loans to stimulate home building; policies to lower interest rates; and encouragement of banks to keep lending to small businesses.

These are sensible enough, but in no way would they generate a robust recovery. By all means, let's scrutinize the candidates' economic programs. But the last thing we need from the media is more pressure on the Democratic field to cure the economy by depressing it.

Robert Kuttner writes regularly on economic matters.

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