PRESIDENT-ELECT Clinton says he hopes to "jump start" the United
States economy to alleviate lingering unemployment and raise the
sluggish growth rate. But what are the prospects that moderately
aggressive government policies can significantly improve the
economy? Indeed, does the economy even need to be jump-started?
Mr. Clinton has mentioned a $20 billion annual program of public
works, mainly infrastructure spending, as a key component of his
economic program. But, historically, government attempts to
eliminate unemployment through fiscal policy measures have met with
very little success.
Public works spending to alleviate unemployment was a hallmark
of the depression-fighting strategy of Presidents Herbert Hoover
and Franklin Roosevelt. But five years after Mr. Roosevelt launched
his New Deal with such infrastructure-creating agencies as the
Works Progress Administration and the Tennessee Valley Authority,
the nation's unemployment rate still exceeded 19 percent.
More recently, similar programs in the 1970s were accompanied by
higher, not lower, rates of unemployment than had prevailed for the
previous three decades.
Two factors that serve to make public works spending ineffective
in dealing with unemployment are timing and "crowding out."
Typically, years pass between the time decisions are made to
build new highways, schools, or sewage systems and the time work
actually begins. This is especially true with today's myriad of
environmental, affirmative-action, and other regulations, not to
mention the time it takes Congress to act.
Moreover, the financing of new federal spending requires taxes
that directly reduce private spending and work effort, or deficit
borrowing that will raise interest rates, also reducing
Our research also shows that unemployment grows when the price
of labor rises for employers. If what we term the "adjusted real
wage" (wages adjusted for changing prices and productivity) rises,
unemployment will increase.
So is it wise even to attempt to jump-start the economy? The
recent recession arose when the adjusted real wage increased,
caused by erratic price changes and wage demands and by government
policies pushing up wages, including a higher federal minimum wage.
For the past year, however, the adjusted real wage has been
falling. Money wage increases have moderated, being offset by
inflation. Increases in labor productivity have lowered labor costs
per dollar of output, enhancing profits and making it profitable to
hire new workers. …