Political Pledges May Indeed Be the Ticket for Prosperity

With all the political coverage of the race for the White House so far, one of the big trends in the economy is being overlooked.

Two out of the three leading candidates are proposing to sharply boost public investment, saying, in effect, “damn the budget deficit, full speed ahead.”

Bill Clinton, the soon-to-be Democratic nominee, and undeclared candidate Ross Perot both talk of programs to Rebuild America, of tax cuts for small business and of creating community development banks to make loans to low-income entrepreneurs.

Clinton last week issued a formal economic plan pledging $50 billion a year of public investment in education, health and infrastructure--including an electronic information highway connecting schools, homes and businesses along with more conventional spending on roads, bridges and water systems.

Perot hasn’t yet issued specifics about his programs but has pledged repeatedly to “reindustrialize America.”

Such policies represent more than wish lists. In some form or other they are likely to be implemented no matter who wins the election--President Bush wants to spur the economy too--because they are a reasoned response to today’s uncertain recovery, and the specter of inadequate growth tomorrow.

Right now the economy is fragile. Bush last week urged the Federal Reserve to cut interest rates again--below the current 3.5% level of its loans to banks. The Fed will debate such action this week. The President’s thinking is that rock-bottom interest rates would spur banks to lend and businesses to borrow.

But he may be living in a time warp. Short-term interest rates are already low and yet bank loans have diminished to their lowest level in more than 30 years. In a chastened reaction to credit debacles of the 1980s, borrowers are wary, banks are reluctant to lend and federal regulators are questioning most loans. The banking industry nationwide is actually shrinking.

And that is limiting the economy’s ability to grow, explains Albert M. Wojnilower, senior economist of First Boston Corp. With 7.5% unemployment, the economy needs to grow faster, and could do so without incurring renewed inflation. But with the banks moribund, says Wojnilower, “the helper and initiator of new business is not functioning.”

As a result, the economy is struggling to achieve even growth rates of 2% to 2.5%--the minimum needed to maintain U.S. living standards.

Clearly, the economy needs a boost. And that’s what Clinton and Perot propose to give it, starting with new wrinkles in banking. Clinton’s program speaks of a “nationwide network of community development banks” that, among other things, would “invest in affordable housing and help mobilize private lenders.”

In Perot’s words, local banks “could become, in effect, investment banks for small business.”

President Bush’s economic proposals rely more on indirect action through tax credits and reductions.

Clinton’s plan notes that Japan and Germany in recent years have been investing more than 12 times what the United States is spending on infrastructure--meaning not only public roads and airports but the kind of research that yields commercial leadership, as the Air Force long ago developed computers and the space program brought advances in semiconductors.

Lately the United States has allowed its infrastructure to become frayed--fading libraries, declining schools, crumbling roads. And it has slipped. An international report on overall competitiveness last week found that the United States has fallen to fifth place--behind Japan, Germany, Switzerland and Denmark! So a major theme of this year’s campaigns is that the time has come for renewal and repair.

Still, Clinton’s plan was greeted skeptically, beginning with questions about how he would finance new investment in a time of $400-billion deficits. Clinton’s dubious answer was that he would raise taxes on incomes over $200,000. Trouble is, trying to tax the very rich doesn’t raise much money to begin with--mainly it makes work for tax accountants and lawyers to find loopholes. Not to mention that raising taxes in such a fragile economy may not be wise.

But that doesn’t mean investment can’t or shouldn’t be made. Properly done, public investments pay for themselves like any other capital expenditures. The Congressional Budget Office calculates that a $1.5-billion investment in an airport runway yields an $11-billion return in productivity growth. Most Americans no longer need lectures on the benefits of investing in education.

We know what needs to be done, but a change in attitude is needed. Get over the idea that we’re paralyzed by the budget deficit and can do nothing, counsels Herbert Stein, who was chief economic adviser to President Nixon. This economy can afford more than people think, Stein wrote recently.

One small piece of evidence of the economy’s continued flexibility is the fact that long-term interest rates declined last week in the face of record U.S. Treasury financings and the announcement of Clinton’s ambitious program. The bond market is saying that there’s no inflation in sight, and money is available to meet the nation’s needs.

And $50 billion seems to be what is needed: 100 U.S. economists, including six Nobel Prize winners, used that figure in recommending a boost to public investment earlier this year. And now a $50-billion call for action is in the program of one, and possibly two, presidential candidates. Renewal is in the air.