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Published on Sunday, April 23, 2000 in the San Jose Mercury News
Heading For A Fall?
As Pro-Market Juggernaut Whittles Away Safety Net, Politicians Leave Americans Vulnerable To Downturns
by Ellen Frank
 
CURRENT CONVENTIONAL wisdom has it that business cycles are obsolete; pro-market policies have swept recessions into history's proverbial dustbin.

But what if we're wrong?

``New Economy'' enthusiasts like President Clinton, proclaiming an end to ``the age of big government,'' have dismantled our safety net. If the millennium boom ends in a Y2K recession, it is not clear whether we could put it together again.

True, the U.S. economy has grown steadily since 1991. This is not the first time Americans experienced a prolonged boom; the economy grew for eight years straight in the 1960s.

But not since the 1920s have politicians and policy-makers placed such utter faith in the market's stability and the boom's permanence.

After World War II, U.S. officials constructed a political and intellectual infrastructure to prevent depressions. First came Social Security, to protect elderly wage-earners in economic downturns. Over the next two decades, legislators added Medicare, Medicaid, food stamps and, of course, welfare as we knew it.

These programs were not conceived as mere charities. They were tools of economic management, carefully crafted to counter business cycles and prevent a repeat of the disastrous wage deflation of the 1930s. Compared with European counterparts, the U.S. safety net was neither massive nor generous, but it did provide a bedrock level of federal spending in lean years and a guaranteed minimal income that kept wages from plummeting in a downturn.

Economics texts called welfare programs ``built-in stabilizers'' because no one who was eligible could be denied benefits for lack of funding. Mandated spending levels rose and fell predictably with the unemployment rate, committing the government to higher spending in downturns regardless of, or despite, sentiment in Congress.

Unpredictable spending levels in turn forced the government to use ``full-employment budgeting,'' balancing its budget on the assumption that the workforce would be fully employed. A downturn that pushed the budget into the red was regarded as unimportant, as long as it was balanced in full-employment terms. This strategy was based on the Keynesian idea that governments should run fiscal deficits to fuel economic growth, borrowing idle funds to pay the workers for whom private businesses had no use.

Such old-fashioned, big-government policies pulled the nation through many an economic downturn. Today, the social-welfare infrastructure is diminished, where not dismantled.

Welfare benefits are no longer entitlements; annual spending is capped and won't rise with unemployment unless Congress specifically allocates new funds. Food stamps and Medicaid remain entitlements only in theory; in practice, eligible applicants are being turned aside by local officials empowered to manage the funds. Only Social Security -- the program least responsive to economic downturns -- remains largely intact.

More worrisome than the shredding of the safety net is the retreat from full-employment budgeting. President Clinton publicly attributes today's boom to tough spending caps and fiscal restraint and has made a fetish of further fiscal austerity. White House press releases propose a future not simply of balanced budgets but of swelling surpluses and debt repayment.

Making America ``debt-free for the first time since 1835'' is the sole goal of Clintonomics. Al Gore assures voters that he will reduce the debt ``even if the economy slows.'' Sounding uncannily like Herbert Hoover, Gore maintains that a recession will provide ``an opportunity'' to cut government spending ``just like a corporation has to cut expenses if revenues fall.''

When former presidential candidate Bill Bradley floated a modest proposal to use surplus funds for health care, Gore attacked the idea as ``fiscally irresponsible'' and warned it might plunge the U.S. economy into recession. Hillary Rodham Clinton, running for the Senate from New York, declared that most problems facing the country ``cannot be solved by government''; she, too, staunchly advocates using budget surpluses to pay off the national debt.

When Democrats, traditional boosters of full employment, are hawking debt reduction, the prospect for anti-recession policy looks grim indeed.

It is no good hoping that such statements will be conveniently forgotten with the next recession. The tools of economic management are not so easily taken up and discarded, at least not in the U.S. political environment.

President Franklin D. Roosevelt spent most of the 1930s striving, with very limited success, to persuade Congress to incur a deficit to counter unemployment. Since the 1940s, every effort to enact programs that avert recessions and ameliorate joblessness has been fraught with controversy, fiercely opposed by conservative groups as ``creeping socialism.''

It took years of struggle and political infighting to craft a social safety net in the United States, and more than a decade of sniping and lobbying to dismantle it.

History has shown that market economies are prone to sharp and sudden downturns, but political change is plodding and slow. New economy or no, Americans should begin planning for the possibility of recession now. If or when the millennial boom gives way to a Y2K recession, stitching together a political consensus for full-employment policies may be possible -- but almost certainly, it will not be quick.

Ellen Frank (frank@emmanuel.edu) is an economics professor at Emmanuel College in Boston and an editor at Dollars and Sense (www.dollarsandsense.org). She wrote this article for Perspective.

2000 Mercury Center.

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