False Boom, Real Bust

It's a recession out there!

By , Philip Mattera, an economist, is the author of Prosperity Lost (Addison-Wesley, 1990).

THE Federal Reserve has finally decided to take serious action in response to what its chairman, Alan Greenspan, euphemistically calls the ``meaningful downturn'' of the economy. Yet it is not clear that the cut in the discount rate will do much to change an increasingly dismal situation. An easing of credit is unlikely to change the current preoccupation of American business with shedding workers. Both those companies that have been hard hit by the current slump, and those that are anticipating such problems, are scrambling to cut costs, particularly of the labor variety. Unemployment has risen to a three-year high and will undoubtedly go higher.

In this kind of recessionary climate, it is not enough to tinker with monetary policy. The federal government needs to embark on some good old-fashioned direct intervention to help people cope.

Yet the White House seems to regard recession as akin to a natural disaster that we simply have to ride out. What is conveniently being downplayed is that the slump is caused by economic forces and can be mitigated by government action. It is a disturbing sign of the new predominance of laissez-faire that government relief is barely being discussed today. Instead, assistance is shrinking. For instance, only about one in three Americans without jobs qualifies for unemployment compensation. And those who do qualify receive benefits that are far from adequate.

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This is all the more troubling because of what preceded the current recession. The expansion of the past decade was not a time of genuine prosperity for Americans.

The income of most families increased modestly, if at all. According to the Census Bureau, median family income in 1989 was, after adjusting for inflation, only slightly above that of 1973. Progress was concentrated among the wealthiest parts of the population. The Congressional Budget Office estimates that from 1980 to 1990 the poorest fifth of American households suffered a 5 percent drop in after-tax income, while the richest fifth rose 33 percent.

Wages went nowhere. Employer demands for union concessions and other pressures to depress pay increases prevented many workers from even keeping up with the cost of living. Last year the average weekly earnings of production workers was $335. In constant dollars this was no higher than in 1961.

Many of the jobs created during the last decade have been substandard in pay and job security and often without benefits. There was dramatic growth in involuntary part-time positions, which used to occur only in recessions. Even before the current downturn began, about 5 million Americans worked less than full time against their wishes.

Temporary jobs expanded even more rapidly. The hiring of ``temps'' used to be common only when the economy was weakening and employers were reluctant to expand their permanent staff. But American business went wild for temps after the end of the last recession in 1983.

Consumer borrowing soared. Many families depend on their credit cards to survive and are overwhelmed by the debt burden. Personal bankruptcies have climbed since the mid-1980s.

Hence the past seven years have hardly been a boom for many Americans. As a result, we could not take the customary precautions - increase savings and reduce debt - to prepare for a recession.

Today, much of America is ill-equipped to survive the downside of the business cycle. In such circumstances it is not adequate for the government to take a hands-off approach. Federal help should come in two main forms. First, unemployment compensation has to be revitalized. Benefit levels are simply too meager. Last year the average weekly benefit was, after adjusting for inflation, lower than in 1980. Most states provide benefits equal to only about one-half of a worker's previous earnings, with strict ceilings. Most people cannot get by with such drastically reduced income.

The other form of needed federal assistance concerns consumer debt. As the recession worsens, it will create a domestic equivalent to the third world debt crisis. Just as hard-pressed countries in Latin American, Africa, and Asia needed relief, so do American workers. Making it easier to borrow more money is not the answer. The White House should work with banks to develop a plan for lowering interest rates on consumer debt and stretching out repayment schedules for the unemployed.

The federal government should also be taking steps to check the expansion of contingent labor by strengthening the equal pay laws and mandating various employee benefits. This will encourage employers, once the economy begins to recover, to create good positions, not junk jobs.

Working Americans suffered during the so-called expansion. Left to the vagaries of the market, they will not be able to weather the rougher times now upon us.

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