Although cautioning that recovery from the current recession will not be seen for another year, economist William Freund expressed optimism about the nation's economic future to delegates at the Opening General Session of the Congress of Cities.
Freund, chief economist emeritus of the New York Stock Exchange and chairman, Department of Economics and International Business, Graduate School of Business, Pace University, offered his short- and long-term outlook, stressing the prospect for federal deficit increases in the upcoming Clinton administration and linkage between education and productivity.
While it is difficult to be specific during an interregnum, Freund said, "more signs are emerging...that our economy is embarking on a steady, if not yet ebullient recovery."
The early 1990's recession has been longer and deeper than predicted by economists, he said, because it had differed from previous post-World War II downturns in five ways:
First, while layoffs were heretofore temporary and confined mainly to blue-collar workers, this time unemployment stems from downsizing and elimination of layers of management and has impacted white-collar employees and the service and government sectors as well as manufacturing.
Second, Freund said, the nation is "suffering the hangover from the 1980's," a decade characterized by an enormous accumulation of government, corporate and consumer debt.
Third, the 1980's saw over-building, particularly office buildings and shopping centers, which will take years to absorb. Moreover, as real estate markets soured, banks were left holding bad loans and tightened credit.
Fourth, the end of the Cold War has brought diminished defense spending.
Fifth, the $300 billion federal deficit will make it difficult for the Clinton, or any, administration to stimulate the economy.
Freund said he and fellow economists cannot be sure when the economy will resume a normal rate of growth, but "we are beginning to get our arms around some of these structural problems." He noted businesses and consumers paying down debts, corporations becoming more competitive and pent-up consumer demands which will stimulate future purchases.
He predicted further improvements in late 1993 and early 1994, once the effects of the Clinton economic recovery strategy are felt.
The essentials of the Clinton package are known--increased infrastructure and job training spending, research and development and investment tax credits, enterprise zones, a network of community development banks--but the question of how much net new economic expansion stimulus it will provide remains.
"The big dilemma is this," Freund said. "if you spend more, and at the same time you raise taxes, and you cut defense spending and you cut other programs, then there is no net stimulus. On the other hand, if you finance that new program with a larger deficit... you're going to scare the bond market and raise interest rates."
When interests rates rise, fewer houses …