‘Quick Fix’ Won’t Solve Nation’s Economic Problems for the Long Term

IRWIN L. KELLNER <i> is chief economist at Chemical Banking Corp. in New York</i>

The American people decided in the 1992 presidential elections that they were tired of market-oriented policies and were ready for a more activist approach when it comes to managing our economy and tackling our major problems.

Voters had become dissatisfied with the sluggishness of the economy and its minuscule pace of job creation, not to mention frustrated with such deep-seated problems as the soaring cost of health care, the ballooning budget deficit, our decaying inner cities, crumbling infrastructure and our apparent lack of competitiveness in world markets. But care needs to be taken to avoid a “quick fix"--especially if it involves more government interference in the workings of the marketplace. For you see, such interference usually winds up being counterproductive.

Two ideas being considered by the Clinton Administration may well fall into this category. The first deals with efforts to make health care more affordable, while the second revolves around ways to reduce the government’s interest expense.

Both seem amenable to a change in government policies, which--in the short run, at least--could produce some benefits. However, it would be wise for policy makers to consider the possible longer-run consequences of such actions--before they create more problems than they solve.


The soaring cost of health care is as major an issue as it is a complicated one, and I will tell you upfront that I don’t have the answers. However, I do have some questions that should be answered before new legislation is proposed.

First, whenever prices of a particular good or service go up faster than all others through good times and bad, one needs to ask what is preventing the market mechanism from working? In other words--why isn’t the supply of health care services (hospitals, doctors and prescription drugs) expanding rapidly enough to meet what is obviously strong demand?

And why is demand so strong? Soaring health care costs are not a recent development, but rather, one that has been underway for nearly 30 years.

That brings me to a couple of the ways that have been proposed to deal with this crisis. The first is to extend coverage to more (if not all) people, while the second is to cap health care price hikes.

In my view, these policies--either one or both together--would turn today’s health care crisis into tomorrow’s health care disaster, where many people would not be able to get treatment at all, no matter what they offered to pay. For they involve what would in effect be a lowering of prices while at the same time shifting demand so that even more health care services would be wanted at a given price than before. Clearly, a shortage would develop in no time, which would mean lines in hospitals and doctors’ offices, and an inability to obtain enough medicine by those who are sick.

Here’s another point worth considering. As you know, a key problem in the U.S. today is lack of new jobs.

It seems to me that forcing employers to provide health care coverage to a greater extent than they currently wish might well stifle job growth even more, since health care is now a major chunk of many companies’ labor costs.

Let’s shift to another problem that needs fixing. By trying to respond to the demands from the financial markets, potential home buyers and the 20% of the voters who voted for Ross Perot, the Clinton Administration is leaving no stone unturned in its effort to bring down Washington’s budget deficit once and for all.


While our new President did call for sacrifices in his inaugural address (presumably in the form of reduced spending and/or higher taxes) he would plainly win more plaudits from the populace if he could come up with an approach that would help to reduce the budget deficit without inflicting pain. Not surprisingly, an idea that has been kicking around for several years has surfaced once again. It involves changing the mix of the securities the Treasury sells to finance the government’s current operations and the rollover of maturing debt.

Here’s the reasoning. Normally, long-term interest rates are higher than short-term rates to compensate bond buyers for the greater risks incurred when investing their money longer term. In the case of government securities, of course, these risks are limited to uncertainties over inflation and the prices of these bonds should they be sold before they mature.

The spread between long and short rates has varied over the years, but it has tended to average much less than it is today. In turn, this has led some to conclude that the government could save between $5 billion and $10 billion a year by shifting its securities sales from long-term debt to shorter-term debt. In addition, creating somewhat of a scarcity of long-dated debt would push up these bonds’ prices, thereby driving down their yields--providing an additional benefit for the economy, since other long-term interest rates would presumably go down as well.

Well, once again, it is necessary to think this through and look beyond the short term. There is no doubt that reducing the supply of long bonds would push their prices up and their rates down. However, to do this when the government’s debt and its borrowing needs are so high would be to risk driving short rates up.


The Treasury has had a longstanding policy of lengthening the maturity of its debt to reduce congestion in the markets. But with its debt as large as it is today, such a policy is literally a necessity. In other words, redirecting the Treasury’s borrowings from the long to the short markets would simply transfer interest rate pressures from the long end to the short end--in the process negating the easy money policy that the Federal Reserve has been conducting for the last three years.

If President Clinton is looking for ways to trim Washington’s deficit as painlessly as possible, he should consider the following:

* Don’t interfere in the workings of the marketplace to achieve what appears to be short-run benefits.

* Remove existing impediments to the efficient performance of the economy, such as the tax act of 1986.


* Further stimulate the growth in tax revenue by accelerating planned spending on the infrastructure.

* Cut Social Security taxes to boost the average household’s buying power.

* Examine the regulatory process to ensure a smoother flow of credit throughout the economy.

* Freeze inflation-adjusted government spending on everything except the interest it must pay on its debt.


It has taken years of policy mismanagement to get us into our current bind; it will take years--and patience--for us to extricate ourselves from it. Hopefully, the Administration will remember this--and the laws of economics--as it tries to get this country back on track.