$60 billion for the economy

Jeff Faux

May 07, 1993|By Jeff Faux

THE bad news suggests that Bill Clinton is a better economist than Bob Dole. But is the senator a better politician?

Senator Dole, arguing that the economy was in good shape, led the Republican filibuster that killed $16 billion in the $31 billion economic stimulus package.

At times, President Clinton seemed alone in insisting that the economy needed a boost in federal spending. Now that he is proved right, he should go back to Congress with a new, doubled stimulus plan to prevent the country from falling back into a recession.

In the first quarter, economic growth slumped to a meager 1.8 percent, all reflecting inventory buildup rather than sales. The index of leading indicators for March dropped 1 percent, the biggest decline since November 1990. Some have attributed the March slump to bad weather, but the early data for April on manufacturing orders and jobless claims indicate that the economy is still sputtering and could stall.

Even if a recession is avoided this year, the slowdown increases the risks in the administration's fiscal 1994 budget.

During his campaign, Bill Clinton showed he understood the danger of cutting deficits too fast. After his election, deficit hysteria was whipped up by Republicans and conservative Democrats, many of whom supported the quadrupling of the national debt under Ronald Reagan and George Bush, and was fanned by Ross Perot.

Added pressure to cut spending and raise taxes came from deficit hawks in the Clinton administration itself. The result is a budget proposal for 1994 that cuts the deficit about $60 billion.

Cuts of this magnitude have led to the last four recessions. Even under strong economic conditions, this would cost more than a half million jobs.

The doomed Clinton stimulus proposal was aimed at making sure the economy would enter 1994 with enough forward momentum to overcome the drag of deficit reduction.

Businesses are failing to create jobs, not because the government has not balanced the budget but because they lack customers. Joblessness slows down consumer spending, which slows down business investment, which creates more joblessness. As a result, federal revenues fall, making the deficit larger.

Deficit hawks say lower deficits will reduce interest rates, which will boost business spending. But despite steadily falling interest rates, the unemployment rate is higher today than 24 months ago, when the economic recovery began.

Lower interest rates make it cheaper to borrow, but they cannot overcome consumer and business anxiety about the future.

The only exit from this trap is for the government to restore consumer and business confidence by creating more jobs. As Mr. Clinton points out, if the government invests in people and infrastructure, it helps increase long-run productivity and growth, without which we will never reduce the deficit.

President Clinton would be wise to go back to the Congress with a new, larger investment stimulus proposal -- this time, $60 billion. Given the jobless rate and reduced production in U.S. and foreign factories, there is little danger of inflation and thus little reason for deficit hawks to keep fretting about financial turmoil.

To overcome another Senate filibuster, President Clinton should vigorously take his case to the nation. Washington insiders would warn that it is politically risky, that Republicans will call him a big spender, that Democrats will not want to revise the budget resolution for 1994 and that Ross Perot will grouse on TV. All problems, no doubt.

But an even greater risk would be for Bill Clinton to repeat the mistake of George Bush, who refused to stimulate the economy -- and paid for it.

Jeff Faux is president of the Economic Policy Institute.

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