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"Poverty, Race and the Deficit Dilemma"

March 1993 issue of Poverty & Race

by Sean Gervasi

It should now be clear that, barring a basic change in policy, the new Administration in Washington is not going to address the major problems of America's cities, home for 58% of our African American population and 52% of our Hispanic population. It will undertake some efforts to help the poor and redress the tax inequities of the 1980s. But it will not launch an effort to rebuild our cities and give the people in them jobs that provide a decent living.

While President Clinton has repeatedly stated that he intends to take the country in a "new direction," his recently announced economic plan represents little more than a minor correction in the course set by Presidents Reagan and Bush. The United States is again following the path of fiscal conservatism.

The Clinton plan, though it has been made to sound like a set of measures aimed at stimulating growth and creating jobs, is, in fact, going to slow growth and hold back the creation of jobs. The net effect of the various tax and spending measures the President has proposed will be to reduce overall spending in the economy by some $450 billion over the next five years. Total expenditure may increase very slightly in the current year, but after that it will be reduced by between $75 and $90 billion a year until 1998.

In sum, the Clinton plan is deflationary. It reduces spending in order to reduce the deficit. In an economy where growth has been slowing more or less steadily for nearly twenty years and which is only now beginning to recover from a long recession, this is extremely dangerous medicine.

What Is Needed

A serious effort to address the urban crisis would require a truly new direction in economic policy, one in which the public sector would inevitably have to play a critical role. But such a policy runs counter to the interests of the power blocs which now dominate the economy. And the indications are fairly clear that we are not going to see a radically different economic policy in President Clinton's fast term-unless, of course, he finds himself facing a world depression and an angry American public.
The new President is an extremely intelligent, humane and concerned person. He is a member of a party which has traditionally relied on urban constituencies, albeit a member of its conservative wing. He has the support of labor and the African-American and Hispanic communities. He is popular with many living in the suburbs, especially the young. And he has attracted some of the best liberal brains in the country to his inner circle.

So far as urban issues were concerned, the hope was that the new President had been convinced by the emerging arguments that the urban crisis could only be tackled by undertaking a massive program of public investment. Many liberal and progressive groups had called for just that, notable among them the U.S. Conference of Mayors. The President's repeated references to public investment in the course of his campaign seemed to suggest that he was in agreement with them.

However, quite apart from the state of the economy, the urban crisis presented some difficulties for a new President nurtured in, and leader of, the conservative Democratic Leadership Council.

The Obstacles

Firstly, the problems of the cities were widely perceived as part and parcel of - not synonymous with - the country's unresolved racial problems. The white middle classes, and the better off working-class whites, had fled the cities for the suburbs. Thus, by 1990, many large U.S. cities were "majority minority" in their population composition, including Detroit, Baltimore, Washington, New Orleans, Atlanta, Newark, Birmingham, Chicago, Memphis, Richmond, Cleveland and Oakland. (By 1993, New York City, Los Angeles, Houston, Philadelphia, San Francisco and St. Louis probably are on the list as well.)

Most of the country's worst problems are concentrated in the central cities: poverty, unemployment, homelessness, inadequate housing, etc. Minority poverty is rampant there. The median income of African-American families is less than 60% that of white families. The proportion of African-Americans living in poverty, 32% in 1990, is roughly three times that of whites.

Secondly, the amount of money required even to begin to resolve the nation's urban problems is very, very large. In fiscal 1981, the U.S. was spending some $70 billion (calculated in fiscal year 1993 dollars) in the cities on such key programs as assisted housing, employment and training, and general revenue sharing. By fiscal 1993, the amount had been cut to some $23 billion.

It could hardly be said that the programs of 1981 were doing much more than preventing immediate disaster. Mounting a real effort to deal with urban problems requires spending at least $100 billion per year.

The Economic Crisis

As President Clinton took office, there was little prospect of any real investment in the cities. The country's economic difficulties meant that the private sector would not direct funds to the cities and it is unlikely that the public would. The principal reason is that the country is still mired in an economy crisis which neither government nor industry is prepared to resolve.

The United States is still very much in the midst of a long, managed depression which has seen widespread deindustrialization and the collapse of the standard of living of the majority of the country's households. Congressional Budget Office figures indicate that between 1977 and 1992 some 70% of U.S. households saw their real after-tax incomes fall.)

It is important to be clear about how serious this crisis is in order to understand that there was little prospect of any kind of real public investment, much less a massive program aimed at rebuilding the cities.

The slowing of economic growth began in the early 1970s. During the 1950s and the 1960s, the rate of growth of the Gross National Product in the U.S. was about 4% per year. During the 1970s and 1980s, it fell to between 2.5% and 2.9% per year. During the recent long recession, it averaged about 1% per year, a little less than the overall rate of growth during the Depression of the 1930s. This increasingly serious economic stagnation caused unemployment to rise and profits and investment to fall. The average rate of profit for non-financial corporations in the U.S., which began to fall in the late 1960s, was in the late 1980s less than half what it had been in the mid1950s. And, by the end of the 1980s, the rate of net fixed investment in the economy, investment in new real plant and equipment, had fallen to a post-war low, and much less than the rates of other major industrial countries.

Officially, there are now some nine million people unemployed in the U.S. In fact, by the Labor Department's U-7 definition, there are at least 4 and a half million more. Jeff Faux of the Economic Policy Institute estimates that the real figure is 16 million.

The consequences of economic stagnation for government revenues were extremely serious. As our economic problems deepened in the 1980s, federal government revenues fell and then rose only slowly. The budget deficit rose and rose. On the whole, economists failed to make the case which they should have made: that the rising deficits were a result of faltering growth and falling government revenues rather than any inherent imbalance between expenditures and revenues.

In these circumstances, there was little possibility of a massive public spending program of any kind. The federal government was, and is, locked into a structural deficit that is paralyzing public expenditure programs, and which in fact poses a constant threat to their very existence, especially the so-called "entitlement programs." (Subsidies to industry and banking have never been given that name.)

The Deficit Bugaboo

The persistence and growth of federal deficits gives conservative politicians the opportunity to argue insistently that the country's principal economic problem is excessive public spending and not the underlying economic crisis. And as the Reagan and Bush Administrations, supported by energetic private campaigns to condemn "big government," deployed their arsenals of propaganda, reason was thrown out the window.

In the public arena, the issue becomes the deficit and not the state of the economy. The deficit becomes the constant, obsessive pre-occupation of American politicians.

Yet at the present $1.2 trillion level of total federal revenues, a 5% annual rate of growth in GNP would generate $35-$40 billion more per year than a 2% rate of growth. Thus, merely by accelerating growth, President Clinton could bring down the annual deficit by more than half at the end of four years.

It is important to note that during the Second World War the deficit was a far higher proportion of GNP than it is today-as high as 25%, compared with the current 5%. Moreover, overall government debt (the sum of past annual deficits) was also a far higher proportion of the GNP in the early 1940s. And the cost of servicing that debt was proportionately far lower, because the government held interest rates very low. Today, the banks demand high interest rates, which raises the cost of debt service that must be borne by taxpayers, a cost that now exceeds $200 billion a year-more than the total of all federal spending for education, housing, welfare, food stamps, law enforcement, transportation and science. The difference between now and the 1940s is that the United States was an industrial society then, and the politically dominant industrial interests demanded low interest rates. With de-industrialization and the rise of a speculative economy, financial institutions hold the key economic and political power.

Neither of the two political parties is ready to propose a policy which would carry the country out of economic stagnation. A multi-year urban policy today -a policy aimed at truly rebuilding the cities of the United States and ending poverty-would cost hundreds of billions of dollars. Mesmerized, as they are meant to be, by the pseudo-problem of the deficit, our political leaders lack the courage to go against the storm of propaganda from special interests which would greet any effort to rebuild the cities.

That the country's present political and economic situation precludes a set of policies aimed at transforming the urban condition is an unpleasant but probably realistic conclusion.

But there is more to say. Many of us are aware that the renewal of our cities must be one of the principal aims of the democratic reconstruction of the country that is so long overdue, the kind of democratic reconstruction at which candidate Clinton seemed to be hinting.

The time has now come for a serious debate about the country's urban crisis not simply as a problem unto itself but a part of a deeper and persistent economic and social crisis which our political leaders clearly are not ready to discuss.

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