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Congress Needs Jump-Start Initiatives to Keep Economic Expansion Moving—Viewpoints | EPI

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Congress needs jump-start initiatives to keep economic expansion moving

By Eileen Appelbaum

The 2001 recession will be the first in history whose causes and chronology were debated even before the downturn began.

In an appearance on NBC-TV’s “Meet the Press” last Sunday, Republican vice presidential candidate Richard Cheney warned that Democratic presidential candidate Al Gore’s insistence on challenging the election results in Florida might make a recession more likely.

Instead of playing the blame game over a recession that hasn’t yet occurred, political leaders from both parties should seek to head off hard times – by investing the federal budget surplus in our nation’s unmet needs.

Blame-gaming may be politically expedient, but it won’t help avert a recession. And this time, Congress and the administration won’t be able to rely on Alan Greenspan to orchestrate the economy by reducing interest rates. That’s because the Fed’s recent rate increases are still rippling through the economy.

Already, economic growth has slowed, and real Gross Domestic Product is now growing at just half its rate for the first six months of the year.

Job creation has slowed even more precipitously. About 1.6 million new jobs were created in the first half of 2000, but less than a quarter as many — only 350,000 — are expected in the second half.

The problems are most acute in manufacturing, where production is contracting and employment has begun to decline. Corporate earnings growth has slowed and profit warnings have taken their toll on Wall Street. Ominously, consumer spending, which has fueled the long expansion, grew an imperceptible one-hundredth of one percent in October.

And the full effects of the interest rate hikes have not yet been felt. It takes a year for rising interest rates to slow production, and even longer to affect employment. So the effects of the most recent increases will continue to be felt well into 2001.

By the same token, even if the Fed were to lower interest rates early next year, the effects of the rate cut wouldn’t be felt until 2002 — too late to undo the damage and stave off a serious slowdown or, worse, a recession.

With Greenspan, for once unable to work his wizardry, it’s up to Congress to make the budget decisions that can keep the economy growing.

After a decade in which both Democrats and Republicans have turned the elimination of the deficit and reduction of the debt into a political religion, it will not be easy for Congress to agree on a plan to reduce the surplus. But agree they must if they want to avoid the mistake of the Hoover administration, the last to insist on balancing the budget even as the economy slowed.

Congress needs to adopt tax and spending initiatives that have an immediate impact on jobs and incomes. Bush’s campaign promise of tax cuts for the wealthy won’t do it. The trickle-down effects are too uncertain, and in any case, take too long for this to be an effective budget policy. But there are bipartisan measures Congress can adopt now to provide a mild stimulus to the economy and keep the expansion going.

One of these would be replacing the Earned Income Tax Credit with a Unified Universal Child Credit, which would increase incomes for low-wage earners and cut taxes for families with earnings between $20,000 and $60,000 a year.

Another option would be investing in early childhood education — building pre-schools, subsidizing day-care expenses, extending universal kindergarten to 3- and 4-year olds — which would pay dividends for families struggling with work and care responsibilities long after it provides a welcome push to the economy. Rebuilding the old and crumbling schools in our cities and older suburbs and refurbishing schools everywhere for the Internet age will not only stimulate the economy, but will yield continuing payoffs in improved educational performance and a better educated work force.

The Fed will need to lower interest rates next year to get the economy back on track. But that change will not come soon enough. Budget initiatives should be adopted quickly to sustain the economic expansion. Congress has no time to lose.

Eileen Appelbaum is the research director of the Economic Policy Institute


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