UNDERSTANDING THE RIOTS PART 5 : THE PATH TO RECOVERY : ECONOMIC RENEWAL : Revive the New Deal: It’s Time for Massive Public Investment

The L.A. riots have again raised the fundamental question of what is the proper role of government in modern society. Is it to let the free market work? Is it to sponsor Great Society programs that redistribute income and war on poverty? Or should the government, as it did in the New Deal programs, aim to put people to work and provide a safety net for those in need?

The answer may be in some combination of free-market initiatives and New Deal programs. In the 1930s, such government agencies as the Works Progress Administration and the Civilian Conservation Corps invested billions in the physical reconstruction of America and put hundreds of thousands of people to work. This precedent of a government actively dealing with long-term problems is deserving of renewed attention.

At the same time, such market-related efforts as Jack F. Kemp’s enterprise zones, which would give tax breaks to investment in depressed areas, and private ownership of housing should also be in the mix. Government cannot do it all. But without active government, certain long-term problems cannot be resolved.

Toward that end, a vast national public-investment program should be started promptly. The most competitive economies in the world are backed by the highest levels of infrastructure investment. Schools and airports, roads and bridges and other public facilities must be built to support the private sector, protect the environment and provide a civilized life to urban and suburban Americans.

We can, and should, commit to invest $1 trillion in this country’s infrastructure during the next 10 years. Financing such a program, which would amount to less than 2% of the decade’s gross national product, should not be difficult. A 25-cent-a-gallon gas tax, increasing over five years to 50 cents a gallon, would generate $50 billion a year by 1997. It would be funneled to a Public Investment Trust, which could also be the recipient of $250 billion to be transferred from defense budgets during the next seven to 10 years. With the backing of these committed revenues, the Trust could raise the necessary investment funds through the sale of investment-rated bonds, which could be acquired by private and public pension funds and other institutions. The assets of these pension funds now amount to about $3 trillion and will double, to $6 trillion, during the next 10 years. They could easily accommodate at least half of such a program, with the public markets taking the rest.

A public-investment program on such a scale would generate significant employment and could absorb many of the skilled people who will be laid off as a result of defense cutbacks; it could defuse the kind of explosions we have just witnessed in Los Angeles; it would send a badly needed signal of confidence to the American public, and it will, most importantly, provide the infrastructure needed for a 21st Century competitive economy.

Public-works construction can deal with the physical decay of the cities. Decent schools, decent housing, safe streets and safe public transport, all would contribute to a different social climate. In addition, an organized effort to provide employment to inner-city youngsters, aged 16-22, should be part of such a program. This could be done through some version of the CCC of the 1930s, whereby youngsters will be first trained and then employed in the reconstruction of their own cities.

The training could be done in army bases available as a result of defense cutbacks. Instructors from the armed forces, with volunteers from construction unions, could provide a framework to house and train thousands of city youngsters. They would be trained as apprentices and paid apprentice wages. Public-school teachers could also help.

The federal government could also work with state and local governments to minimize the impact of defense cutbacks by targeting public-investment programs wherever possible and by providing retraining and relocation programs where such opportunities are too limited. The defense industry is probably the largest single pool of highly educated and skilled industrial talent in the country. At a time when the educational and skill levels of our work force are suspect, these talents have to be put to good use. That means redeploying the people designing and building weapons systems to critically important civilian activities.

The government can also use this opportunity to play an important role in the private economic sector. For example, the federal government, as well as state and local government, can assist in the conversion to civilian use of certain types of defense activities. The need for new mass-transit equipment, water-treatment plants, airports and rapid-rail systems, large-scale engineering projects dealing with roads, bridges, sewers and electrical systems will allow governments at all levels to use purchasing power to help convert defense facilities and talent to civilian use. This should be part of an overall plan to finance infrastructure and to give the benefit of these programs to domestic companies. This would generate significant levels of domestic jobs.

There will inevitably be questions about how to pay for any of these initiatives, especially since, after our recent budget battles, federal deficits are now running at $300 billion or more for 1992, with no real expectations of significant reductions in the near future. The answer is twofold.

First, there are areas, such as public education, where more money will not be the only answer; using available funds, under a carefully structured system of parental choice, coupled with a systematic shrinkage of the educational bureaucracy, would be a good beginning. A federal involvement in education could also include two additional areas: decent physical facilities and the application of technology. Insofar as physical facilities are concerned, the ability of pension funds to invest in new bonds for infrastructure projects could be a significant factor in local school construction. In addition, the federal government should devise programs, in partnership with private industry, to bring technology to the public school. Public schools may be one of the last places in America where technology has had practically no impact.

Second, our country, compared with other developed democracies, is not overtaxed. If we were forced to do so, it would not be difficult to impose a temporary 5% surcharge on personal and corporate income to pay off the saving-and-loan losses over five years, instead of borrowing $500 billion over 30 years. With gas prices down, we can surely tax ourselves by 50 cents a gallon, or $50 billion a year, to invest in our country. Another $20 billion to $25 billion a year can be gradually taken out of our defense budget--over and above the present forecast, and picked up by Europe and Japan. Taxing benefits such as Social Security and Medicare for upper-income recipients could raise tens of billions of dollars annually. The lower interest rates and stronger dollar resulting from such a program could give a powerful boost to our economic recovery.

This kind of program is obviously controversial. Taxes of any kind are controversial. Any kind of business-government cooperation that smacks of planning is controversial. The use of pension funds for infrastructure, no matter how secure, is certainly controversial. But I believe the time has come at least to discuss a different approach because the road we are on does not lead to a solution of our problems.

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. Government cannot abdicate its responsibilities. It must be actively and intelligently involved in this process.