Despite the recent euphoria on Wall Street and despite the prospects for a quick end to the war, it is awfully hard to credit the predictions of a robust and sustainable recovery. Most of the ingredients that pushed the economy to the brink of recession before the war began are still at hand. It has been nothing short of bizarre to read about soaring stock prices, while the same business pages report of deepening catastrophe in industry after industry and while the banking crisis worsens. Consumers are holding back not just because of war anxiety, but because after a decade of borrowed prosperity and stagnant real income, they are tapped out.
In the short run, Wall Street has forecast a boom for three main reasons. The war seems to be ending, the price of oil fell a lot faster than most people anticipated, and the Federal Reserve has been easing money. All of these factors are, of course, a tonic for the real economy and especially soothing to the Street. But the real structural causes of declining American competitiveness and slow growth antedate the war and will not be cured by an early peace.
This recession will be difficult to surmount for several reasons. Deficit spending has become an addiction, rather than being saved for use as a periodic injection in hard times. The war increases the 1991 deficit by about $100 billion. As a tool of recovery, additional fiscal stimulus is simply not available. Likewise, given our dependence on foreign borrowing, there are limits to how much the Federal Reserve can ease credit without frightening away foreign buyers of Treasury paper. Supposedly, an export boom will rescue us, but with the economies of Europe and Japan slowing, it's hard to believe that exports will be strong enough to power a recovery. In fact, the export-growth rate has been slowing. In constant dollars, exports increased by over $80 billion in 1988, by less than $40 billion last year, and will rise by perhaps $30 billion--about half of one percent of gross national product--this year.
NEW JOBS. But if fiscal and monetary stimuli are not available, and exports are no panacea, what--if anything--can we do? The most sensible recovery idea I have heard, and perhaps the only feasible one, comes from two think tanks. Interestingly enough, one is quite avowedly liberal, the other somewhat conservative. The idea is an "investment-led recovery."
The liberal version, promoted by the Economic Policy Institute, calls for a substantial increase in public infrastructure. The EPI, citing work by economists Alicia H. Munnell and David Aschauer, notes that nonmilitary public investment fell in the 1980s to a rate half that of the 1970s and just one-fourth that of the 1950s and 1960s. The EPI's Jeff Faux observes that public investment--financed presumably by dedicated taxes--would attack the backlog of rotting roads, bridges, subways, runways, and environmental projects. That, in turn, would create new jobs and markets for mostly domestic goods and services and stimulate new technologies. Aschauer calculates that if public investment had stayed at its historic levels in the 1980s, private-sector productivity growth would have been 50% higher.
The more Republican-oriented Economic Strategy Institute offers a variation on the same theme but, fittingly enough, one that relies on the private sector. The ESI's president, Clyde V. Prestowitz, calls for tax and regulatory changes that would encourage utilities and telephone companies, which are currently sitting on huge pools of cash, to invest their money in modernization of privately owned public infrastructure. The utilities and the Baby Bells, notes Prestowitz, have liquid assets of close to $100 billion. Instead of allowing U. S. regulatory constraints to drive them to buy up telecom companies abroad, Prestowitz wants the Baby Bells to invest in a state-of-the-art optical-fiber grid for the U. S.
CASH-RICH. Encouraging the Baby Bells to make such an investment would require liberalizing both depreciation allowances and regulations that currently prohibit local operating companies from offering consumer services such as cable TV and videotext. Prestowitz also proposes changes in depreciation rules to encourage cash-rich electrical utilities to invest in a new generation of energy-efficient generating capacity. Both of these initiatives would stimulate the economy macroeconomically and at the same time use advanced technology to upgrade the infrastructure.
The last time the economy blasted out of recession on an investment-led recovery was in 1941. Then, the investment went mostly for war. Even so, it wiped out unemployment, increased civilian purchasing power by 50%, and powered a whole generation of technical learning. World War II, at its peak, spent upwards of one-third of GNP. The Persian Gulf war, by contrast, is costing less than 2% of GNP, and there is not much technological spillover from the Stealth bomber or the Patriot missile.
We ought to be able to gain the economic stimulus of wartime investment without World War III. The solution is to eliminate the military middleman and put the capital into civilian infrastructure in the first place. It's heartening to see both liberals and conservatives wrestling with versions of this basic, good idea.