WASHINGTON -- Despite recent signs of recovery, 100 of the nation's leading economists, including six Nobel laureates, yesterday called on President Bush, Congress and the Federal Reserve to adopt new programs to promote growth.
Alarmed by the economy's weakness, they advocated a further cut in short-term interest rates, tax credits for business investments in plants and equipment, and $50 billion in annual federal aid to state and local governments.
In an open letter, they acknowledged that their growth program would temporarily boost the deficit and disturb the bond market. But they argued that the damage from a failed recovery would be even worse.
Their unprecedented action sought to turn the election-year political focus from boosting consumption through a middle-class tax cut to increasing productivity through private and public investment. And their call for immediate action runs counter to the belief that the business cycle will bring a recovery without further monetary or fiscal intervention.
Nobel laureate Robert Solow of the Massachusetts Institute of Technology said the group took the initiative because, even if a recovery were under way, it was likely to be "weak," and there was little threat from inflation.
"It seems to us, even if some sort of upturn is in the cards for the next quarter, the risk to the economy of overstimulating is minimal," he said. "If we do nothing, there is a much larger downside that the recovery would be too weak. In particular, it is not likely to be strong enough by itself to generate the need for new investment that we think the economy must have to regain productive strength over the years ahead."
Also sounding the caution, if not alarm, that underpinned their action, Marshall Pomer, visiting scholar at the University of California at Berkeley, said: "There was a false recovery in the late spring and early summer of last year. By doing nothing we risk prolonged stagnation, feeble recovery or, worse, no recovery at all. If we worry about the deficit now as our first priority, we will strangle the recovery."
On their three major proposals the economists made these points:
* Cutting interest rates. This would stimulate short-run spending on investment that would pay off over the long run. Previous reductions were already benefiting the economy, but there was room for further action.
Edward Yardeni, of C. J. Lawrence Inc., suggesting a 1 percent cut, said: "Low interest rates do seem to be creating some recovery out there, but we want to be sure there is no false recovery."
Federal Reserve Chairman Alan Greenspan has recently testified before Congress that he believes there is enough monetary "ease" in the economy now to underpin recovery, but that he remains ready to lower interest rates if growth trends start to reverse.
TTC * Investment tax credits for business. This would be more effective than the sort of capital-gains tax cuts proposed by Mr. Bush and Congress because it would focus on new investments. It should be more generous for investments over the next two years to encourage prompt financial action. "Business investment spending will stimulate economic activity now, and the new plant and equipment will add to future productivity," the economists said in their letter.
* Federal aid to states and cities. The $50 billion-a-year program should be enacted by Congress immediately. Initially it should have minimal conditions attached to it, to allow speedy and unfettered use of the funds to boost the economy. Later it should be targeted "to ensure that the assistance is directed toward investment in people, knowledge, and productive infrastructure."
It should be financed by federal borrowing, which would add to the deficit, until the economy recovered enough to enable defense savings or higher taxes to be earmarked for it.
The panel judged the local aid to be a better way to boost the economy than cutting income taxes, which would promote consumption, not investment.
"Although there is a case for a quick temporary tax cut, history tells us it would be almost impossible to reverse. Over-consumption is our chronic disease, not the cure," they said in their letter.
Boston Mayor Raymond Flynn, president of the U.S. Conference of Mayors, said in a statement: "The appeal made today echoes the appeals of mayors throughout the country who know that, with a federal stimulus to 'prime the pump,' our cities can lead this nation out of recession and into the new world economy. Washington must listen."