Recipe for a Depression

D URING the past decade the one thing Americans have known for sure about the federal budget deficit is that it is bad. Government spending soaked up money that industries could have been using to create new technologies and new jobs. No wonder incomes have grown so slowly, while the American economy as a whole has worn its iron collar of debt.

But what if the one thing we all know is wrong -- or, more precisely, what if it is out of date? In the early 1980s, when budget deficits were soaring as a share of the national economy, politicians were slow to recognize the political and social distortions that a decade of heavy borrowing could create. Since the early 1990s, in contrast, budget deficits have been shrinking in relative and absolute terms. The broad context of the deficit is missing from public discussions of the economy: the current bipartisan drive to eliminate the deficit is occurring in the midst of falling wages, corporate downsizing, and the Federal Reserve's push for zero inflation.

What are the likely economic consequences of all these things happening at once? In one of the following articles ["The Forces Making for an Economic Collapse"] Thomas I. Palley, a professor of economics at the New School for Social Research, argues that our next recession might turn into a depression. The accompanying article ["The Economic Consequences of Mr. Clinton"], by Robert A. Levine, a former Congressional Budget Office economist, fits the Palley scenario into history, likening President Bill Clinton's economic policies to those of Winston Churchill in the 1920s, when, as Chancellor of the Exchequer, Churchill followed the counsels of orthodoxy and deflated first the British and then the world economy as the Great Depression loomed.

Unfortunately, everything Levine says against the Clinton policies applies even more strongly to those of the Dole-Gingrich Republicans. The "demand-side alternative" he outlines as a way back from Palley's brink has no champion in this year's election.

The Atlantic Monthly; July 1996; Recipe for a Depression; Volume 278, No. 1; page 43.