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January 12, 1992
"America Needs to Work Smarter - Thinking Could Help the Economy"
San Jose Mercury News

By Timothy Taylor
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SCREAMING "DO something" and "fix it" is far easier than specifying what should actually be done to address the economy's recession. The problem is that most of the choices being discussed are either unavailable, or have already been tried, or are unlikely to have much effect.

For example, one standard economic prescription for the ills of recession is to have the government prod the economy with a tax cut or a spending increase.

But the economy built up a tolerance for feverishly high budget deficits in the mid-1980s. By not taking the medicine of reduced deficits then, deficit spending has become a less available remedy today. After all, the federal government is already stimulating the economy to the tune of a $350 billion deficit, and it's not working.

The other standard economic prescription for recession is for the Federal Reserve to reduce interest rates, which has also happened with a vengeance in recent months.

But lower interest rates don't necessarily mean that businesses want to borrow much more for investment or consumers want to borrow much more for cars and houses. Not when debt is already high from the excesses of the 1980s. And not when profits and jobs are being threatened by the recession.

Moreover, financially wobbly banks and savings and loans are not eager to be aggressive lenders, regardless of how low interest rates fall.

So with the obvious recession fighters in handcuffs, politicians are turning to some unlikely choices. Some of the rhetoric surrounding President Bush's recent trip to Japan made it sound as if the economy was just a Japanese trade barrier away from hurdling to recovery. Other proposals suggest just a little bending of the tax code -- perhaps for capital gains, or medical care, or individual retirement accounts, or business investment -- to catapult the U.S. economy back to health.

Free trade is a good idea, both for the United States and for Japan, and at least a few of the proposed changes in the tax code might not be destructive. But steps like these will barely nudge the $6 trillion ocean liner of the U.S. economy. The U.S. economy is not yet made in Japan, and tinkering with the tax code offers no magic bullets to slay a recession.

The starting point for thinking seriously about economic policy in these troubled times is to recognize some hard realities. Recessions happen. They cure themselves, but slowly. By running a $350 billion deficit and holding interest rates at their lowest in 20 years, the federal government is already doing about everything it can to help the economy bounce back.

So when it comes to economic policy, this is a good time to focus on areas where plenty of money is being spent, but isn't accomplishing what it could.

Health care is an obvious example. The United States spends more than $700 billion on health care per year, one-eighth of gross national product, but its health statistics are not notably better than countries that spend proportionately half as much. Moreover, tens of millions of Americans have no health insurance at all.

Public education is another. Spending per primary student has risen substantially over the last few decades, but the quality of high school graduates has not kept pace.

Of course, more money might help health care and education, but the extra funds might also vanish into a sort of black bureaucratic hole. Both systems are in need of a thorough overhaul.

Another no-cost, sensible reform would be to the banking laws, to give banks greater freedom to compete and to reform federal deposit insurance so the taxpayer is less likely to be on the hook when a bank or savings and loan turns belly up. Another such reform would be to switch research and development money from military to civilian technology.

You get the idea. Of course, these sorts of reforms would be difficult. They require facing down powerful U.S. interest groups, rather than venting bile on wily foreigners. And unlike a quick hit of tax dollars or a tax cut, they require actual thinking about how matters should be arranged.

But even a complete list of these policy reforms would miss the largest potential economic reform of all, because that reform is not related to government policy.

A wise economist once defined the economy as what happens when 100 million people get up and go to work in the morning. The biggest economic reform of all would be for all those workers to work smarter. Not harder -- American workers put in plenty of hours -- but smarter.

Sure, some individuals have more power than others: the head of General Motors bears more responsibility for the plight of the auto industry than does any individual assembly line worker. But I'm afraid that if America waits for its economy to be rescued by its chief executive officers, we may end up stranded. Sure, it's a tough, competitive world economy, and tougher still in a recession. Sure, it's emotionally fulfilling to blame top managers and politicians and Japan and the Arabs and sunspots and the greenhouse effect for anything that goes wrong. But for the long-term health of the U.S. economy, nothing is more important than an ethos that says we have the responsibility and power to solve our own problems.

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