What the Government Should Do

The current presidential campaign has so far failed to provide something we badly need: a discussion of what government should and should not do in a modern industrial democracy. The recent events in Los Angeles have shown that government must be much more active in dealing with social problems such as public education and health care, drugs, housing, unemployment, and public safety. Government, in my view, must also be much more involved in stimulating economic growth if the American tax base is to be sufficient to support the social services we need, and if revenues are to grow at a rate that will enable us to reduce the deficit.

The need to define the government’s part in the economy is long overdue. If we observe our competitors abroad, whether in France, England, Germany, or Japan, their governments are more active than ours in encouraging investment in infrastructure and new technology, in supporting joint ventures, and in financing primary and secondary education.

By contrast our own efforts at public investment have been relatively feeble. The administration and the Congress recently came up with a five-year, $150 billion transportation plan. It is a step in the right direction but it is still inadequate. Taiwan, approximately the size of Pennsylvania, has announced a six-year plan for investing $600 billion in public infrastructure. West Germany will have invested $1 trillion in East Germany, a country of 17 million people, by the year 2000.

The federal government should commit itself to providing up to $1 trillion over the next ten to fifteen years to supplement existing state and local government spending for infrastructure. The actual pace of the buildup will depend, in part, on the capacity of the construction industry to keep pace with new projects, as well as the overall demands the government will make on the financial markets. However, the fact of a sizable long-term commitment to infrastructure on the part of the federal government is more important than the exact amount to be invested or the precise period during which investment would take place. Such a commitment would involve partnerships of public and private investors to build new airports, new air-traffic-control systems, and rapid rail links, as well as more traditional public investments, in roads, bridges, new schools, mass transit, and the other basic requirements of an urban and suburban society. The need for such investment should no longer be a matter of debate. As a recent study put it:

Public investment in infrastructure has dramatically declined. Over the last two decades, non-military public investment, as a fraction of GNP, was only 65 percent of its average level during the preceding two decades, falling from 3.7 percent to 2.4 percent. When depreciation is taken into account, the rate of non-military public investment in the 1980s was only half that of the 1970s and just one-fourth that of the 1950s and 1960s.

The same study estimates that:

a one percent increase in the level of core infrastructure will increase GNP by as much as 0.24 percent. Morever, after four years or so, each additional dollar of public investment in infrastructure will raise private investment by 45 cents, contradicting the notion that a dollar of public investment merely “crowds-out,” and therefore reduces, private investment.

The basic reason why public capital improves private sector efficiency, profits, and investment is that public facilities provide productive services to firms, such as an effective transportation system of airports, highways, and mass transit. These public facilities are as necessary to the production process as a firm’s own capital equipment.^*

We can afford such a program, which would amount to less than 2 percent of this decade’s GNP, and we can finance it, despite the current budget deficit. Financing could come from new revenues as well as from transfers from existing military budgets. A twenty-five cent per gallon gasoline tax, increasing over five years to fifty cents per gallon, would generate $50 billion a year by 1997. This money should be funneled to a Public Investment Trust, which could also receive $250 billion that would be transferred from defense budgets over the next ten years. With the backing of these revenues, the trust could, over the ten to fifteen year period, raise the necessary investment funds through the sale of investment-rated bonds to private and public pension funds and other institutions. The assets of American pension funds currently amount to about $3 trillion and will double to $6 trillion over the next ten years. They are quite able to finance half to three quarters of such a program, while the public bond markets could finance the rest.

A public investment program on such a scale would produce millions of new jobs, in the private as well as the public sectors, and could absorb many of the skilled people who will be laid off as a result of defense cutbacks. It would also help to defuse the kind of explosion we have recently witnessed in Los Angeles and would, most importantly, provide the infrastructure needed if the US is to compete in the world economy of the twenty-first century.

The physical reconstruction of America would provide a base from which the country could begin to deal with the deep social and economic problems of our big cities. The current combination of inner-city physical decay, inadequate public education, and high levels of unemployment, along with the breakdown of the family structure and a rising sense of anger and despair, leads to violence of the kind we saw in Los Angeles. The anger and destruction that became so visible there are, in fact, part of everyday life in our big cities. They just take place on a smaller scale, mostly in poor neighborhoods, and they are not televised. Unless we do something about it, every major city in this country will be increasingly subject to a downward cycle of fear and violence, followed by repression, followed by more fear and violence. No civilized democratic society can long tolerate such a cycle.

Public works projects can help to reverse the physical decay of the cities. Decent schools and housing, safe streets and safe public transport, all would contribute to creating a different social climate. Such programs could also provide employment to inner-city youngsters between sixteen and twenty-two years old through a version of the Civilian Conservation Corps of the 1930s, in which young people would be first trained and then employed in the reconstruction of the cities they live in. Some training could be done in the military bases that will become available as a result of defense cutbacks throughout the country. Volunteers from construction unions and construction companies, for example, and instructors from the armed forces, could also train thousands of city youngsters as apprentices, who would be paid apprentice wages for their work. Public school teachers could help to improve reading and other skills. Jesse Jackson and other black leaders, and Hispanic leaders, should have an important part in this effort.

For such a program to succeed would require a vast partnership between the federal and local governments, and unions and private businesses, to provide investment and job opportunities and training on a large scale. Market-related efforts such as HUD Secretary Jack Kemp’s proposals for enterprise zones and private ownership of housing, instead of government-subsidized projects, should also be among the programs pursued. Those who say such a coordinated effort is impossible should be asked: “What is the alternative?” The arson and violence next time may not be limited largely to the inner cities.

As part of such a program, the federal government could also work with state and local governments to minimize the impact of defense cutbacks wherever possible. Government agencies could encourage public investment in places where defense workers have been laid off; and where this is not possible, they can still provide retraining and relocation programs. The defense industry contains probably the largest single pool of highly educated and skilled industrial talent in this country; it should be put to use, especially when the education and skills of so much of the American work force are believed to be inadequate. That does not mean continuing to build unneeded Seawolf submarines in Groton, Connecticut, in order to protect jobs. It means finding ways to transfer the people who now design and build the Seawolf to badly needed civilian activities, including, in some cases, teaching and urban reconstruction.

In the same vein, the federal government, as well as state and local governments, can also assist in converting to civilian use certain other types of defense activities. Government officials should be finding ways to draw on former military facilities and the skills of defense workers when they purchase new mass-transit equipment, waste treatment plants, new airports and rapid rail systems, large-scale engineering projects for roads, bridges, sewers, and electrical systems. Such conversion programs should be carried out by domestic defense companies, as opposed to foreign suppliers, for this would create large numbers of domestic jobs.

In encouraging the conversion of military facilities and factories to civilian use, the government can also directly support critical American industries, for example the manufacture of commercial aircraft, now America’s biggest export. The world market, until recently, was dominated by two American companies, Boeing and McDonnell Douglas. During the last few years, Airbus Industries, a European consortium heavily subsidized by its participating governments, has taken about 30 percent of the world market. As a result, McDonnell Douglas has been trying to sell 40 percent of its commercial aircraft division to Taiwan to raise $2 billion of capital for the development of its next generation of jumbo jets.

Is there a way to keep control of the technology and production of this important American asset in the US? Every major American defense contractor—including Lockheed, General Dynamics, Rockwell, and Grumman—will have, as a result of defense cutbacks, large excess manufacturing capacity and unused skilled labor. Would it not make sense for one or more of these companies, instead of the Taiwanese, to join forces with McDonnell Douglas? If the federal government were to assist in such a joint venture—as it once planned to do with the supersonic aircraft—with an initial order for a certain number of cargo or transport versions of the new jumbo jet, the joint venture could easily raise the needed capital from domestic sources. Control of an enormous export asset would thereby remain in the US; additional skilled jobs would be created; and advanced facilities that would otherwise be left idle by defense cutbacks would be converted to worker use.

In a different sphere, the federal government should also be making greater use of the domestic economy in its economic assistance to the former Soviet republics. Clearly it is in our self-interest to help them make the transition to democratic government and a market economy; but this should be done in ways that will help American business and create American jobs. The Bush administration has said it wants to take part in the multinational aid programs for the former USSR now being discussed with the IMF, the World Bank, and the EC’s European Bank of Reconstruction and Development, based in London. The IMF recently estimated those needs at $44 billion in the coming year, and about $100 billion over the next four years, which would supposedly be provided by the IMF, the World Bank, the governments of industrial nations, and private investors. To what degree the US will participate, however, remains unclear. Congress may approve a $12 billion American increase in the IMF capital, and, in addition, the US is guaranteeing $2 billion of grain export credits and has promised $3 to $5 billion of additional assistance.

Strangely lacking, however, are the kinds of assistance that would be most useful both to the former Soviet republics and to the US economy. These are:

a) Giving the republics export credits that would be guaranteed by the US government and tied to the purchase of US goods. (So far, we have limited these types of credit to agricultural products.)

b) Large investments by US corporations, guaranteed by the US Overseas Private Investment Corporation (OPIC), which would assist the former Soviet republics in reconstructing critical parts of their economy while also creating US jobs and business activity. The former Soviet nuclear-power plants, for example, would either be reconstructed with a safer nuclear technology or linked to different sources of power. It is no secret that the nuclear power plants now in the former USSR and Eastern Europe present a major risk of nuclear accidents that could affect the entire world. None of the countries involved has the capital or the technicians to make the necessary conversions, which are probably as important for international safety as is disarming nuclear warheads.

This is a project that will take years, and tens of billions of dollars to complete. American companies, or groups of companies, such as Westinghouse and GE, together with such large engineering firms as Bechtel and Fluor, could take on some part of this task, providing equipment and components and American technicians and helping to maintain a strong US position in developing nuclear-power technology—but only if the US government guaranteed some portion of the contracts, either alone or as part of a multinational effort. Both the republics and the US economy would benefit. (It is expected that a plan to deal with this subject will be submitted to the leaders of the seven major industrial nations at their July meeting in Munich.)

Other parts of the former Soviet economies can be revived only through large foreign investment combined with foreign management. The extraction, refining, and marketing of oil and minerals are obvious examples: successfully transforming them would mean foreign exchange for the former Soviet republics and access to Western credits and goods. The same could be said for telecommunications, a market in which the investments of US corporations, if they meet reasonable standards, should be guaranteed by the US government. The former Soviet republics need direct investment and management know-how at least as much as they need balance-of-payments credits. The US needs economic stimulus and investment to create more jobs. No doubt such programs would entail significant financial risks: the export credits might not get repaid; the US companies receiving investment guarantees might ask the government to cover losses. However, if the programs are prudently administered, the benefits could outweigh the risks. The programs would, most importantly, secure a long-term position in these potentially huge markets, for American businesses and for the American economy.

The export credits should, I suggest, be the responsibility of an expanded Export-Import Bank and the investment guarantees should be made under the US Overseas Private Investment Corporation. The credit of the US government would be available in case of defaults, confiscation, or non-payment by the former Soviet republics. Suppose that $10 to $20 billion were committed to this purpose over the next five years. This sum is relatively modest compared to the $1.5 trillion of military expenditures budgeted for the same period, or compared to the gain for the US economy and international security that would result, especially if one recognizes that guarantees do not necessarily mean losses, which could, in any case, be limited to a fairly small fraction of the credits or guarantees. It is an illusion to think the former Soviet countries can make the transition to the market economy without large-scale direct involvement, possibly control, by Western industries for a long time to come. Some of these investments, such as Chevron’s recent agreement to develop oil fields in Kazakhstan, can stand on their own. But many US industries can become seriously involved in Soviet development only with government support; but doing so can have a very beneficial domestic impact.

These are just some examples of the need for the US government to take a more creative part in our economy. They obviously will not eliminate the budget deficit but they could assist in putting the country back on the road to real economic growth. Clearly the federal government cannot do all that will be necessary, but both private business and local government will need its active help to carry out the investment and development that should be undertaken if we are to have economic growth and social cohesiveness at home and be competitive internationally. Doing so will certainly require a change in our current political philosophy, and may require certain new institutions as well. So far the government has sadly failed even to conceive of any large plans to involve business and labor in increased domestic and foreign investment.

Between now and the year 2000, dramatic and wholly unpredictable changes will be occurring throughout the world. The geopolitical map will be very different. Political argument about the economy will no longer be over capitalism versus socialism or communism, but over one form of capitalism or another. US capitalism carries with it a relatively high-risk, low-tax economic environment in which an inadequate social safety net leaves many people in difficulty and the government’s responsibility for the economy is sharply limited. The European system requires higher taxes and brings with it a stronger safety net, greater government involvement in the economy, and relatively less risk to the individual worker.

These differences suggest the real choices that will have to be made during the coming decade—as opposed to empty arguments about the ideological contradictions between wealth and fairness. There can be no fairness without growth and the creation of new wealth; and there can be no sustained growth in a democracy unless a fair distribution of resources assures equality of opportunity. No such growth and no such distribution will take place in the US unless the government actively and intelligently helps to bring them about. How the government can do so should be the central issue of the current political campaign. So far, it is the unasked question.