AMERICA’S economy is headed for a major slowdown.
Whether there is a recession (two
quarters of negative growth) is less important than the fact that the economy will operate well
below its potential, and unemployment will grow. The country needs a stimulus, but anything
we do will add to our soaring deficit, so it is important to get as much bang for the buck as
possible. The optimal package would contain one fast-acting measure along with others that
could lead to increased spending if and only if the economy goes into a steep downturn.
We should begin by strengthening the unemployment insurance system, because money
received by the unemployed would be spent immediately.
The federal government should also provide some assistance to states and localities, which are
already beginning to feel the pinch, as property values have fallen. Typically, they respond by
cutting spending, and this acts as an automatic destabilizer. Federal assistance should come in
the form of support for rebuilding crucial infrastructure.
More federal support for state education budgets would also strengthen the economy in the
short run and promote growth in the long run, as would spending to promote energy
conservation and lower emissions. It may take some time to put these kinds of well-designed
expenditure programs into place, but this slowdown looks as if it will last longer than some of
the other downturns in recent memory. Housing prices have a long way to fall to return to
more normal levels, and if Americans start saving more than they have been, consumption
could remain low for some time.
The Bush administration has long taken the view that tax cuts (especially permanent tax cuts
for the rich) are the solution to every problem. This is wrong. Tax cuts in general perpetuate
the excessive consumption that has marked the American economy. But middle- and lowerincome
Americans have been suffering for the last seven years — median family income is
lower today than it was in 2000. A tax rebate aimed at lower- and middle-income households
makes sense, especially since it would be fast-acting.
Something should be done about foreclosures, and appropriately designed legislation allowing
those who have been victims of predatory lending to stay in their homes would stimulate the
economy. But we should not spend too much on this. If we do, we’ll wind up bailing out
investors, and they are not the ones who need help from taxpayers.
In 2001, the Bush administration used the impending recession as an excuse to cut taxes for
upper-income Americans — the very group that had done so well over the preceding quartercentury.
The cuts were not intended to stimulate the economy, and they did so only to a limited
extent. To keep the economy going, the Federal Reserve was forced to lower interest rates to an
unprecedented extent and then look the other way as America engaged in reckless lending. The
economy was sustained on borrowed money and borrowed time.
The day of reckoning has come. This time we need a stimulus that stimulates. The question is,
will the president and Congress put aside politics to get the job done?
Joseph E. Stiglitz, a professor of economics at Columbia and the author, most recently, of
“Making Globalization Work,” was awarded the Nobel in economic science in 2001.
Courtesy: NY Times