Remedies For A Uniquely Frail Recovery

It is now clear that this recovery is not only weaker than previous recoveries, it is fundamentally different. While cyclical forces such as an improved housing market are pushing the economy forward, deep-seated structural problems are throwing up barrier after barrier to growth. The decline of the defense industry, the globalization of the economy, the bank crisis, firings instead of temporary layoffs, and the debt binge of the 1980s all work against a normal economic rebound. The result is a stuttering recovery that may be unable to generate enough jobs to keep the unemployment rate from rising to 8% by the fall. Unfortunately, policymakers in Washington are underestimating the impact of these new structural elements and are still taking a conventional approach to promoting growth. Predictably, the Federal Reserve is pushing short-term rates down in hopes of stimulating demand. Congress and the Administration are in gridlock, paralyzed by the $350 billion federal deficit that prevents fiscal stimulation.

This won't do. What is needed from our leaders is a recognition that the 1990s' economic landscape is different, requiring flexibility and originality in policymaking. It doesn't take a rocket scientist to come up with a growth plan, either. We all know what has to be done. The Fed has to get long-term, not just short-term, interest rates down. That would reliquify consumer balance sheets and spur the flagging housing market. The Fed could explore several options, including the purchase of 30-year Treasury bonds in the open market. It could also jawbone the banks that have rebuilt their balance sheets by not passing on the benefits of low rates to borrowers. If the prime had fallen as much as cd rates, it would be 4% instead of 6% today.

Consumer demand can only be rekindled if the job market improves. A significant federal capital-spending program that would pump money into low-tech roads and bridges, high-tech fiber-optic highways, and worker-training programs would be a wise investment. The money would generate jobs and, more important, improve the productivity of the work force. To pay for more fiscal stimulus, Congress must bite the bullet and cap the growth of the the nation's runaway middle-class entitlement programs that soak up 60% of federal spending. This is the only way to gain any control over our economic future. The polls show that people are willing to take more risk in solving the nation's economic problems. Giving up some consumption for investment in human capital and infrastructure is the only route to healthy sustainable growth. And that's true whether or not any Presidential candidate has the courage to say so.