Government Spending Is Back. but for What?

Article excerpt

American companies had Western Europe frightened. They were overrunning the Continent, displacing native enterprise. Anger swelled at American imperialism. But a French journalist, J.J. Servan-Schreiber, had a different explanation.

In passionate prose, full of respect for the United States, he argued in The American Challenge, a best seller in 1968, that America's success reflected a bold, innovative corporate sector combined with generous government spending. The two reinforced each other, generating expansion and prosperity. "This takes us a long way from the old image of the United States -- a country where business was not only separate from government but constantly struggling with it," Servan-Schreiber wrote.

America is mounting another challenge, this time declaring war against terrorism, and hastily resurrecting federal spending, which had fallen into disrepute. As in the 1960s, federal spending now seems important for the nation's success. Gone or suppressed is the "old image," that government is by nature inefficient and should be shrunk to accommodate a private sector insistent on functioning unencumbered.

Reacting almost overnight to the war and the incipient recession, Washington is stepping up spending for the military and for security at home. It is providing billions for repairs in Lower Manhattan and to bail out the airlines. Two proposals would extend unemployment benefits and subsidize health insurance premiums for workers who are laid off. But once the crises subside, will government spending go back out of style?

So far, the answer from Washington is yes. Fighting terrorism and recession is likely to increase federal spending by $60 billion to $80 billion in coming months. The emphasis is on the short term, to deal with war and recession, not on the public sector's long-term needs. Even Democrats in Congress who want to enhance government's role in the economy do not talk publicly about doing so.

Some still hold to a view that was popular in the Clinton administration, that balanced budgets and fiscal restraint are better for the economy than repairing infrastructure. Other Democrats are afraid of being called big spenders, "The ghost of health care `94 and the larger specter of spending before that seem to haunt them," said Robert B. Reich, President Clinton's first secretary of labor. He is one of the few Democrats to argue that federal spending, properly done, will pay for itself in rising economic growth. …