Perot's Misplaced Budget Priority
ROSS PEROT correctly insists that the key issue in the presidential election is economics. Mr. Perot's book, "United We Stand," lists many problems; two of them - increasing productivity and balancing the budget - receive special emphasis. Balancing the budget, the unifying theme of the book, is, according to Perot, the solution to America's economic problems.
The question is: Will Perot economics restore the United States economy to the American people and make America great again?
No. Trying to balance the budget as a national economic objective is inherently destabilizing. Most attempts at balancing the budget will deepen and prolong our current recession.
George Bush proposes to cut taxes while lowering government spending by an even greater amount. While a tax cut would raise demand by giving people more take-home pay, that rise in demand would be more than negated by the decrease in government spending.
Bill Clinton's proposals, focused on raising taxes and government spending, could result in a small rise in total demand, but it would be too weak to take us out of the recession quickly or decisively.
But while all of the candidates' policies have problems, Perot economics - proposing sharp cuts in government spending and raising taxes - is the worst of the three approaches. His program, which would decrease demand for goods and services, would lead the US economy closer to the very economic depression that Perot warns us about.
Balancing the budget is pertinent to families, companies, and other organizations, but not to society. While an individual's spending does not directly affect his earnings, in the economy as a whole one person's consumption is another's income.
For example, if you treat your friends to lunch at McDonald's, your weekly paycheck remains unchanged; McDonald's take, on the other hand, rises. Thus, during recessions - periods of weak demand - trying to balance the budget by decreasing government spending or increasing taxes usually weakens demand even further and increases the budget deficit as government tax receipts drop.
According to Perot economics, if we don't balance our national budget now we must pay in the long run - with lower productivity, lower savings rates, more unemployment, and intensified urban problems. This wrongly assumes that trying to balance the budget will form the basis for a booming economy. The opposite is true.
Perot economics will weaken, not strengthen our economy. His program - shrinking demand - will lower corporate profits and increase excess capacity (idling more factories), removing firms' key incentives to invest in more and better machinery and technology. In the long term, productivity and international competitiveness will suffer. As the recession deepens, incomes will drop but consumption, because of fixed expenses, cannot fall as fast; thus savings will decrease. Unemployment will also increase, wi dening the gap between the rich and the poor. Since unemployment hits the cities the hardest, urban problems will intensify.
Unfortunately Perot economics is only slightly worse than Bush or Clinton economics. None of the candidates has focused on our most pressing economic issue - the recession. Too many people don't have jobs; too many firms cannot sell their products.
To stimulate investment, improve our productivity, increase savings rates, alleviate urban problems, narrow the gap between the rich and the poor, and get closer to a balanced budget, we must get the economy moving again. To get the economy moving, we should keep interest rates low, increase government spending and decrease taxes.
Yes, in the short run, the budget deficit will rise. In the long term, however, the budget deficit will drop - either absolutely or as a percent of our gross national product. The US economy would once again become the world's strongest economy. This is what Bush, Clinton, and Perot all want. With Perot economics - or any other attempt to force the government to balance its annual budget as a national policy objective - this is the opposite of what we will get.
Americans are right to be disillusioned and disappointed with our current leaders and correct to seek better answers to our economic problems. But Perot economics is neither a novel nor a better answer.