Macroeconomic Strategy for the 1990s: Getting the Long Run Right

The central economic debate for the first half of 1993, couched in terms of short-run economic stimulus versus long-run deficit reduction was misleading for U.S. long-run strategy. Our long-run depends on growth, but economic growth does not have the close relationship to deficit reduction that is frequently asserted, and deficit reduction should not become the central objective of economic strategy that it is becoming. It has been asserted that: (1) U.S. productivity is decreasing, but the record of the 1980s does not bear this out; (2) productivity increases depend on increased investment in business plant and equipment, but technological change and associated factors like education are important; and (3) investment in U.S. plant and equipment has been decreasing because of decreased American savings caused by increased deficits, but investment has not been decreasing, although more of it has been financed from abroad. In any case, increased consumption is frequently a better way of increasing investment than is increased saving. The drive to cut the deficit may thus exert a long-run downward pressure on growth and employment. Further, it may also cut back public expenditures for infrastructure and other needs, which may be as important for growth as private investment. None of this means that the deficit should be ignored. It does mean that it should be put into proper proportion relative to the total of the factors needed to encourage economic growth.