Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: THURSDAY, February 4, 1993 TAG: 9302040384
SECTION: EDITORIAL PAGE: A9 EDITION: METRO
SOURCE: GARRY FLEMING
DATELINE: LENGTH: Medium
REVIVING THE ECONOMY
NOT SINCE 1932 was the state of the economy so important as in 1992 in determining the outcome of a presidential election.The defeat of George Bush, as well as the strong showing by Ross Perot, was the electorate voting with its wallets. During the campaign, Clinton promised us no more Reagan-Bush "trickle-down" economics in the form of tax incentives to the wealthy that would somehow eventually benefit the not-so-wealthy.
Of course, one major side effect of those tax cuts was the large and growing federal budget deficits of the 1980s. And as any Keynesian will tell you, budget deficits usually lead to increased demand and economic expansion. This explains the economy's performance between 1983 and 1988.
Unfortunately, for deficits to continue to cause economic expansion, their size must increase over time. Realizing this, Clinton is considering a reversal of his campaign pledge of halving the deficit by the end of his first term, and instead is contemplating deficit expansion to stimulate the economy.
I believe this is an unwise decision. Increasing the size of the deficit means even more borrowing by the government. Increased borrowing will lead to higher interest rates, which tends to reduce spending by the private sector.
What happens is that we trade more government spending for less private spending, leaving total spending more or less unchanged. Meanwhile, the national debt continues to grow at an ever-increasing rate, and even more revenue in future budgets must be allocated to paying interest on the borrowed funds.
The alternative is to begin reducing the size of the budget deficits with a combination of expenditure cuts and revenue en-hancements, and couple this with an easier monetary policy from the Federal Reserve Board.
Deficit reduction would reduce the need for future government borrowing, resulting in lower interest rates and the promotion of private spending. Any new taxes or tax increases should take the form of consumption taxes rather than income taxes, to minimize production disincentives.
With inflation at the retail level at less than 3 percent, an easier monetary policy could offset the short-term contractionary effects of reducing the deficit without bringing inflation up to an unacceptable level. At the same time, lower interest rates would stimulate capital formation and enhance labor productivity, while lowering the value of the dollar on world currency markets and, in doing so, help reduce our international trade deficit.
Clinton promised to fight budget irresponsibility. The good news is that he can do just that and, in the process, promote a healthy recovery. If he fails to take this option, the flood of red ink will continue drowning our economy.