Growth Acts As A Tonic For Economic Ills But Expansion Raises Specter Of Inflation, High Interest Rates

Amid a profusion of ideas about how to deal with the nation’s scores of economic deficiencies, there is one encompassing way that has to be aired.

It is faster economic growth.

Such a course is not without dangers, inflation being one, but the alternative might be more dangerous, as measured in slow growth of incomes and living standards, social problems and a general lack of opportunities.

While growth can create problems of its own, the impact is diminished by the broad number of areas where it helps, including lowering budget deficits, aiding the poor, raising highway safety, improving the environment.

Included in the list would be a stronger Social Security system and perhaps more effective ways to deal with the delivery of health care. Above all, it could mean a substantially higher standard of living for all.

Why, therefore, the hesitancy? Answer: Fear of inflation.

It is not just a surface fear that produces a momentary chill; it is deep in the marrow and imprinted on the soul, a morbid fear, a horror of letting a monster tear through the economy as in the 1970s and early 1980s.

Between 1974 and 1981, the annual rise in the Consumer Price Index ran into double digits four times, stealing the buying power of millions of American savers. It was the biggest bank heist of all time.

In an attempt to control that inflation, the prime lending rate rose into double digits for six straight years through 1984 (18.7 percent in 1981), destroying thousands of small businesses and slowing the growth of big ones.

It also set off a string of massive budget deficits, some of which ironically resulted from government spending in an effort to ameliorate the problems created by those deficits.

From a deficit of $30.2 billion in 1979, annual shortfalls rose as high as $294.9 billion in 1992. And, of course, taxes rose too, reaching a postwar high of 34.4 percent of total income in 1995, more than food, clothing and shelter.

The memory and effects linger.

Just as millions of Americans suffered through the depression of the 1930s and can never forget it, those who endured the 1970s and early 1980s can never forget inflation and high interest rates.

Neither can the Federal Reserve and apparently the White House, which feel satisfied that an economic growth rate of 2.5 percent is the limit.

The Fed especially is concerned that beyond 2.5 percent the economy will strain its plant and investment capacity and be forced to employ less skilled workers, resulting in inefficient production and rising prices.

Time and circumstances have changed, Fed supporters say. One of the biggest changes has been in the huge federal budget deficits that compete for investment capital. In addition, they say, the private sector is heavily burdened by taxes and regulations.

Free it by reducing regulations, lowering taxes, encouraging investment and spurring entrepreneurial activity and the economy will grow on its own, raising living standards and providing Uncle Sam with the revenue he needs.

Between 1960 and 1988, the economy averaged growth of 3.2 percent a year. Since then it has lagged closer to 2 percent, and is now somewhere around 2.5 percent.

That might not seem like much difference, but already in the 1990s the lower growth rate has cost the economy billions of dollars, certainly enough to eliminate the budget deficit and pay for infrastructure improvements.

A model of the economy by Fiscal Associates, a consulting firm operated by former Treasury economists, shows the enormous economic impact of a 1 percentage point difference.

In a study for the Institute for Policy Innovation, a private think tank, Fiscal Associates shows that if the economy grows at 3.5 percent while population grows at 1 percent, living standards will double in 30 years.

But if growth is held to 2.5 percent, it will take 50 years for the standard of living to double.

In such numbers lies the explanation for the difficulty in reducing budget deficits and raising living standards.

It is the reason also why the issue of growth will be central to political debate over next few months. It is the big one, lying at the root of almost every other economic issue now on the agenda.

It is, in the current vernacular, the mother of all economic issues.