The economy appears to have weakened again after a modest improvement during the summer. Now a year and a half old, this recession is the longest since the Great Depression. December's unemployment rate of 7.1 percent is the highest yet in this recession. And most forecasts for the coming year suggest we will not grow fast enough to lower the unemployment rate much.
Primary responsibility for getting us out of the recession lies with the Federal Reserve. It dramatically - although belatedly - lowered interest rates in December, cutting the discount rate a full point to 3.5 percent. I do not expect the economic indicators suddenly to blossom. But lower interest rates will have a positive impact on the economy.In principle, fiscal stimulus could be a useful complement to lower interest rates in promoting a healthy recovery. But such stimulus would have to be carefully targeted and clearly temporary if it is not to hurt long-term growth by permanently raising the deficit.
America's fundamental economic problems will not be cured by a recovery from the recession. Real hourly pay of the average American worker is only 3 percent higher now than it was at the depth of the previous recession in 1982. This stands in marked contrast to the years from 1948 to 1973, when real wages grew 3 percent per year.
Productivity growth is the key to raising wages and incomes and to making us more competitive internationally. American businesses have achieved increases in output per hour of about 1 percent per year over the past decade while the Japanese have raised their productivity four times faster. Much of the responsibility for improving productivity rests with the private sector. But government has a role to play. We must stop neglecting public investment in infrastructure, technology and the quality of our work force. The economy is not going to strengthen fundamentally until we boost saving and investment. And that won't happen until we bring down the budget deficit. Government borrowing crowds out money for private investment and drives up interest rates.
Congress is considering a number of anti-recession measures. And the president offered his own program Tuesday night in his State of the Union message. We have to resist the temptation to make politically popular tax cuts the centerpiece of any recovery program. Any tax cut large enough to matter for the recovery will be too large in terms of the budget deficit. And there is a real danger that we could have a tax-cut bidding war between Congress and the president.
I don't think we need a net tax cut. But tax reform that tries to restore some of the progressivity lost in the past decade makes sense on fairness grounds. It also makes sense to implement any tax reductions for lower- and middle-income taxpayers now, when they can provide some fiscal stimulus, and to defer the tax increases that balance these cuts until the economy is stronger.
A temporary investment tax credit may well be the most effective way to stimulate a stagnant economy. And grants to hard-pressed state and local governments can relieve pressure on them to cut worthwhile long-term investments in infrastructure and education.
I support congressional moves to cut defense spending and use the savings from Pentagon cutbacks to pay for deficit reduction and some more investment-oriented spending, such as for better health care, education, housing and transportation. This reorienting of our budget priorities is critical, but we must stick to our commitment to bring the deficit down.
It is very tempting to think that the answer to our economic problems is to reduce taxes. But the real challenge is to increase national saving and redirect our public and private spending toward more productive long-term investments.
(Rep. Lee H. Hamilton, D-Ind., is chairman of the congressional Joint Economic Committee.)