Thursday, October 22, 2009

Spending priorities to build a solid economic foundation

Published in Standard-Examiner, Ogden, Utah, October 17, 2009

By Vijay K. Mathur

It is disturbing to watch the news media and see our leaders make false and illogical statements on many of the policy issues facing the country. The economy is undergoing some fundamental economic changes. Unless we implement a strategy which builds our shattered financial and industrial base, our future will not be merciful on our standard of living. Disagreement over policies to stimulate growth and employment is expected in a democracy. However, abusive slogans, name-calling, and racial slurs only dissuade us from making sound decisions to solve problems collectively.

The U.S. faces the near-term problems of anemic economic growth and high unemployment rate and the long-term problems of depletion of human capital stock due to neglect in funding for education and diminished industrial base.

In the near term we face anemic and slow recovery. However, even if the economy's growth picks up at 2 percent to 3 percent in 2010 or 2011, according to some forecasts, the unemployment problem -- especially for young adults -- will be with us for some time to come. Federal Reserve Bank of Cleveland reports that in the Blue Chip survey 80 percent of the respondents predict that unemployment rate, which is close to 9.8 percent (not counting discouraged workers who dropped out of the labor market), "will not fall back below 7 percent until the second half of 2012 ...."

Government may have to address the problem of unemployment by implementing policies like investment tax credit and generous depreciation allowance to businesses (provided they promote investment in the U.S.), a payroll tax holiday (as recommended by former labor secretary Robert Reich) to small- and medium-size businesses, two-tier system of minimum wages, and permanent reduction in personal income tax rates for the middle class.

The service sector usually responds to the growth in manufacturing sector. From the long-run perspective, we have not made the required significant investments in new industries of the future to replace traditional manufacturing capacity. Therefore, outsourcing of manufacturing capacity would also lead to outsourcing of business and technical services over time.

If we wish to create an industrial base which carves out comparative advantage in order to compete in the world markets and solve the long term structural unemployment problem, our future lies in developing technologies, products and services in the fields of renewable energy, environment, information technologies, bio technologies, education and health care. And none of the innovations in the above areas will materialize without investment in the educational system to build human capital stock.

Many conservatives contend that the Obama administration is spearheading too many new initiatives: health care, education, cap and trade to limit CO2 emissions, renewable and alternative energy other than oil. But if one rationally examines the current economic situation facing the country, one would conclude that neglect of these issues now will haunt us in the future. Fiscal conservatives who are worried about the burden on future generations should support initiatives for long term investments now, so that we leave a prosperous economy for generations to come. Note, that besides the amount, efficient allocation of investment also matters for economic growth.

Fiscal conservatism is a virtue when the macro economy is growing and those who want to work have satisfying jobs. But when the economy is in shambles and we as a nation are determined to fight others' wars, fiscal balance is the main casualty. Fiscal stimulus to finance investment rather than current consumption is precisely the right medicine at this point in the economy, even with the rise in deficits, because the economic consequences of postponing such investment could be disastrous. The benefit-payoff of investments, especially in new technologies and new products' development and in education, has a long lead time. Hence, it requires patience and sacrifice of current consumption.

We are still enjoying the benefits of the innovation of electricity in 1880, investment in highway network in the 50s, public investment in Internet technology in 1969. Due to high risks involved in investments like basic science and technologies, education, renewable energy, power network, transportation systems, environment and health care, it will require a private-public partnership. In addition, a concerted effort has to be made by the private sector in partnership with the public sector to facilitate commercialization of technologies to build the industrial base.

I hope that our political leaders provide accurate information to the voters about the perils our economy faces and sacrifices they have to make to build a strong economic foundation that can support sustainable economic growth. Growth with prosperity shared by all Americans in the near term and in the future, will assure us economic, social and political stability. In addition, as Professor Benjamin Friedman of Harvard would argue, an added advantage of shared prosperity due to economic growth is that it makes a society more tolerant.

Mathur is former chair of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. He is also adjunct professor of economics at Weber State University, Ogden, Utah. He resides in Ogden.

No comments: