The Economy Needs Certainty, Not Stimulus

The Monterey County Herald, January 12, 2003
By Leon E. Panetta

During early 1993, when the Clinton administration was considering the need for additional stimuli to a slow economy, an economist from Wall Street called me at the Office of Management and Budget to advise against it: “The only real stimulus to the economy is a greater sense of certainty about the future of the nation.”

The administration should have taken his advice at the time. Instead, it proposed a stimulus bill that failed in the Congress. It was only when the 1993 economic plan was enacted with a 5-year program to reduce deficits that both Wall Street and businesses had some sense of confidence about the fiscal future of the country.

An economic quick fix would not work in 1993 and it will not work in 2003.

Today, both political parties are fighting over competing programs to jumpstart the economy. President Bush has proposed a $674 billion program of tax cuts, new spending and unemployment assistance over the next 10 years. Democrats are proposing a smaller package of rebates, investment incentives and unemployment relief. But as many economists have pointed out – even assuming early passage of any stimulus bill – neither package would do much to spur economic growth or reduce the nation’s jobless rate. Indeed, the bulk of any tax cuts and new spending would not be felt until late 2004 – too late to provide any quick boost to the economy.

The problem with the economy relates much more to the uncertainty of the future than it does to the need for more government spending in tax relief or assistance. The chief economist at National City Bank in Cleveland was recently quoted as saying, “My assessment is that it is war jitters that are giving the economy a soft patch. Because of the nature of the problem, people have to entertain, realistically, worst-case scenarios.”

Businesses and individuals remain reluctant to make significant new investments because they are worried about what can happen in the next few months to their family, their nation and their world. No amount of stimulus can overcome that concern.

The Federal Reserve has already cut short-term interest rates 12 times in two years – to 1.25 percent, their lowest level in four decades – and is running out of obvious ways to stimulate the economy.

Rather than confronting the larger uncertainties that are undermining the will to invest, both parties are looking for political cover to appease their supporters.

Both the president and the Congress would do far better to focus on the real underlying fears that are weakening the U.S. economy rather than wasting time and money on economic placebos. Just look at the list of potential crises the United States is facing over the next few months:

War with Iraq. For more than 12 months, this nation has lived with the very real probability of a renewed war effort against Saddam Hussein. Every day has witnessed growing tension, threats and intimidation between the two nations. Despite the efforts at diplomacy and U.N. inspections to resolve the crisis, it is clear that the continuing mobilization of U.S. forces in that part of the world intensifies the prospect for war.

Whether that war will bring quick victory or prolonged warfare is not clear. What will be the impact on oil prices and relations with the Muslim world? What will be the ultimate cost in money and lives? There are a lot of unanswered questions that perhaps may not deter the war planners but make the average investor pretty nervous. No stimulus plan will relieve that concern.

Confrontation with North Korea. The administration now faces the very real possibility that another member of the so-called “Axis of Evil” will obtain additional nuclear bombs.

Caught in its own pledge to preemptively strike at any terrorist nation that possesses weapons of mass destruction, the U.S. is trying to avoid having to fight both Iraq and North Korea at the same time. While the president speaks of a peaceful resolution, North Korea is continuing to reactivate its nuclear reactor, kick out U.N. inspectors and move ahead to add bombs to its nuclear arsenal. All of this makes people worried about the prospect of an additional war on the Korean Peninsula. No stimulus can help here.

Another Terrorist Attack. Since September 11, we are all too aware of our vulnerability to random terrorist attacks. Regular alerts, continuing Al Qaida attacks and increased security all make clear that we live with the very real threat of another attack in our homeland. Sept. 11 was a major blow to the U.S. economy. Again, money alone cannot make average citizens who fear for their security suddenly become big spenders.

Growing Deficits. Both the states and the federal government are facing huge deficits that make the future economic, social and financial fabric of the nation that much more unstable. States alone are facing budget deficits in the range of $60 billion to $85 billion for fiscal year 2004 – deeper than they have been at any time in the last half century. States will be forced to lay off workers, raise taxes and drastically cut spending. The federal government, which should also be taking strong steps to control growing deficits, instead is planning to add anywhere from $200 billion to $600 billion to its future deficits.

Deficits raise long-term interest rates and rob vital capital from the private markets. Any stimulus will only exacerbate that problem.

The nation simply cannot afford what both parties are proposing to help the economy. While targeted federal relief for the states and for the unemployed makes sense, the more expansive stimulus proposals only ignore the real wolf at the door – the overwhelming crises and uncertainties that worry businesses, investors and consumers alike. Without their willingness to take risks, there can be no recovery.

The better stimulus would be for the president and the Congress to make clear that they have a plan to deal with these crises. In the post-Cold War and Sept. 11 world, the United States has gone from one crisis to another – from Haiti to Bosnia to the Middle East to Afghanistan, Iraq and North Korea – without any sense that our policy decisions are grounded in a firm belief about what our role is in the world. What is it exactly that the United States stands for, what are our goals for the world and how do we intend to achieve them?

The same is true for fiscal policy. The nation has gone from $300 billion deficits to a balanced budget – then back to deficits again. What is the fiscal policy of the nation and how do we provide a more stable future for our retirees and children?

Of course there will always be new challenges and crises – that is the nature of the world we live in. But in the very least, we need to have a clearer vision about the values we stand for and why these crises represent a threat to those values. If our leaders can inspire that broader sense of national mission and commitment, it will be the best stimulus not just to the American economy, but to the American spirit.

LEON PANETTA, is a former congressman and White House Chief of Staff whose column appears regularly in Commentary. Readers may write to him at the Panetta Institute, 100 Campus Center, Building 86E, CSU Monterey Bay, Seaside, CA 93955.

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