WHEN the economy began to grow at a modestly improved 3.9 percent rate in the third quarter, there was a chorus of comment that further stimulus in the form of public works spending or other public outlay was no longer needed; many economists advised President-elect Clinton to let nature take its course and pursue deficit reduction.
However, at his press conference last Tuesday, Mr. Clinton sensibly declared that in his view the economic slump is far from over. He strongly
hinted that budget balance will be postponed in favor of an economic recovery program. Mr. Clinton has again made clear that his own way of how to think about the economy is rather more complex than the question of whether the economy needs stimulus this quarter or next.
Indeed, far too much discussion of our economic problems lately has been one-dimensional. Economic discourse tends to be conducted in a misleading idiom that commends "stimulus" when the economy is too cold and economic contraction when it is too hot. This, I think, is a badly bastardized legacy of John Maynard Keynes, which leaves out other questions and other remedies.
The emphasis on "stimulus" as the only important economic question sent me to the bookshelf to consult that classic essay, George Orwell's "Politics and the English Language." "If thought corrupts language," Orwell wrote in 1946, "language can also corrupt thought. A bad usage can spread by tradition and imitation, even among people who should and do know better."
Packed into the clinical-sounding word, "stimulus," numbly repeated by economists, politicians and journalists, is an entire world view which presumes that economic problems are basically cyclical. But the question of whether to stimulate or not is far too narrow a view of the economy.
For one thing, it ignores the fact that the kind of government stimulus is just as important as the amount. It is entirely possible to have the wrong kind of stimulus, which is what occurred during the 1980s.
In that delusional decade, we had a massive economic stimulus, in the form of budget deficits made newly respectable by conservative sponsorship. The idea was that tax cuts aimed at the well-off would make investment, savings, and hence, the economy, grow. They didn't.
Many economists conclude from that debacle that we simply had too much stimulus. Their answer is deficit-reduction, even at the cost of lower living standards.
But that conclusion is mistaken, too. In the aftermath of Reaganomics, growth has petered out because the Reagan program never ignited investment. Today, the economy is stuck in a slow-growth trap, with low investment and low job generation, notwithstanding the continuing "stimulus" of $300 billion public deficits year after year. Yet if we cut those deficits by raising taxes or reducing spending, the rate of investment and growth will be even lower.
The real, and more complex, issue is not whether to stimulate, but how to raise the rate of investment and growth, now and over the long term. Tapping government credit is one way to increase short-run investment -- if those borrowings are actually invested and invested well. Mr. Clinton's proposed program of infrastructure investment and targeted tax credits is one good strategy of quickly boosting investment.
To view such investment merely as short-term "stimulus" misses the point entirely. For the longer term, the economy needs both to raise the rate of investment, and to change the way our economic structures work, so that the money we invest is used more productively. This means more efficient schools, worker training systems, banks, avenues of research and development, and so on.
For now, growth of 3.9 percent for one quarter is nothing to crow about. In the first year of recovery after the 1981-82 recession, the economy grew at about 7 percent.
Despite the brighter third quarter picture, most economists forecast growth in 1993 in the range of 2 percent to 2.5 percent. So the economy needs a complex strategy to restore high growth, and on all fronts.
In another famous essay of the mid-20th century, "The Hedgehog and the Fox," Orwell's great contemporary Sir Isaiah Berlin quoted the Greek poet Archilochus: "The fox knows many things, the hedgehog knows one big thing." Sir Isaiah observed that thinkers can be divided into foxes and hedgehogs. The hedgehog "relates everything to a single central vision."
After a much oversimplified hedgehog decade ("Get the government off our backs"), President-elect Bill Clinton is an overdue fox: He grasps the complexity of our real economic problems. He will resist simplistic formulations, such as to stimulate or not to stimulate. And in this economy, he had better be one smart fox.
Robert Kuttner writes a column on economic matters.