TUCSON -- A new administration in the White House and a large freshman class in Congress have given rise to hope that new remedies will be found for the nation's fiscal problems.
Whether that is actually going to happen, and whether change will be for better or worse, was the focus yesterday at the start of an industry conference here sponsored by Municipal Bond Investors Assurance Corp.
"The election is a basis for new hope that we will attack some of our large economic problems, which I think are rather deep-seated and will take a while to deal with," Paul A. Volcker, former chairman of the Federal Reserve Bank, said in an interview. "But I think that now we have potentially a launching pad for dealing with them."
Volcker, chairman of James D. Wolfensohn Inc., noted that President-elect Bill Clinton has emphasized the need for increased infrastructure spending, but warned that the deficit must also be a high priority.
"The deficit problem is a kind of cancer eating away at the nation's investment," Volcker said.
By draining away private saving, the deficit stunts private investment and contributes to the national recession, several speakers stressed.
Echoing that theme Sunday night was Rep. Richard Gephardt, D-Mo., who set the tone of the conference with a speech pointing out the delicate balance between deficit reduction and the need for increased investment.
"We have to do both," Gephardt said. "We have a deficit, but there's a need for investment in infrastructure, particularly in the area of higher education and technology."
The need for a fiscal stimulus package was also discussed, along with warnings about the pitfalls of such a policy.
Benjamin M. Friedman, chairman of Harvard University's economics department, said, "This is an economy that needs to be moved back into a high state of production."
But he said the type of investment needed to make that change should be geared toward moving the nation away from the high consumption and low investment dynamic that prevailed over the last dozen years.
"We have not invested systematically for at least a decade in just about all of the makings of a strong, prosperous economy," he said, pointing in particular to roads, bridges, education, and new research.
Friedman said he expects a stimulus package in January from Clinton, but noted it is not yet clear how big a push should be attempted.
The danger in pushing too hard is a negative reaction from the bond markets, which, fearing inflation, could drive long-term interest rates higher and defeat the very purpose of the stimulus package, he noted.
Some market participants say those worries have already been registered through rising interest rates over the past several weeks.
Gephardt, the House majority leader, said competing budget goals will mean spending cuts in several areas of the budget, and he suggested limits on increases in healthcare costs and a faster trimming of the defense budget for a start
In particular, he proposed capping federal health-care costs at six points above the national inflation rate, then gradually reducing the cap to match the inflation rate.
Gephardt said that strategy would save $150 billion in five years. But Louis W. Sullivan, President Bush's secretary of health and human services, called that idea "very dangerous."
Sullivan said such a "global budget" policy would resemble the current national health-care system in Canada, which he said would stifle private initiative and add to the large federal health-care bureaucracy.
In addition to proposing healthcare spending reform, Gephardt also said a modest increase in energy taxes "could be sold to the American people."
