The US is now suffering from a “contained” depression. It is visibly present in the social pathologies surrounding us, which are particularly pervasive in our disintegrating cities, and less visibly present in the decade-long decline of real incomes of all families, save those at the very top. At least 60 percent and as much as 70 percent of the increase in national wealth during the Reagan years went to the richest 1 percent of families; the incomes of the approximately 70 million families that make up the lower four fifths declined. The depression has been contained only because the economy has deposit insurance, social security, and unemployment benefits. Without these safeguards we would be in an uncontained fall similar to that of the 1930s—not simply worried over a rise in unemployment to 7.5 percent of the labor force, but in despair over a rise in unemployment to 25 percent.
All depressions are slowdowns in the momentum of growth. Except for its rising volume of exports, American business is contracting, not expanding. The manufacturing sector has been weak for two years. Construction is at a standstill because our cities are glutted with unrentable office space. Most important of all, we lack the technological or organizational stimulus to launch the “transformational” growth that took place previously when the railroads were being constructed, or the country was being electrified, or during the automobile boom that started in the 1920s. Unfortunately, when transformational growth runs out, there is little the private sector can do.
Along with many other economists, I have frequently urged that a plausible alternative exists, one that has long been ignored: we can revitalize the growth process by undertaking a program of investment in the public sector. Such a program would for the most part be carried out by private companies, large and small, but it has the advantage that it could be set in motion by specific federal programs, as a private boom could not. Moreover, a public investment program could also contribute to the larger changes that are badly needed: bullet trains to link major cities, major construction to restore the inner cities, a long overdue effort to upgrade our educational system. These could invigorate the economy as effectively as any technological or organizational revolution now in sight.
Indeed, the need to improve the nation’s roads, bridges, dams, water supply, airports, mass transport systems, and schools is now so urgent that even fiscal conservatives make an exception for infrastructure when they condemn “wasteful government spending.” Many economists have become convinced that investment in infrastructure could now produce more growth in the private sector than the same amount of direct investment in the private sector. The research of David Alan Aschauer has shown that because our infrastructure has been so neglected a dollar spent for public investment today can raise GNP between two and five times as much as a dollar spent for private investment.
Unhappily, there is a hitch: it is the deficit. We cannot …
'Contained Depression' December 17, 1992