NCPA - National Center for Policy Analysis

Options Available To Keep Economy Humming

July 30, 1998

In the bad old days, any hint of a recession was met by politicians with cries for more government spending to head off the downturn. But that only piled on more government debt.

This time around, the nation's leaders do have viable policy options to avert a recession and keep the economic expansion going, in the view of Massachusetts Institute of Technology economist Rudy Dornbusch.

  • The economic situation today differs from previous periods in that there is no inflation and the government's coffers are overflowing with a budget surplus.
  • Thus, budget deficits no longer stand in the way of tax cuts and inflation does not preclude interest rate cuts by the Federal Reserve.
  • So the Fed has the option and could easily counter a stock market plunge -- one potent cause of recession -- by lowering rates.
  • Tax cuts could be employed without fear of increasing federal debt, in order to stimulate consumer demand and capital investment -- both effective agents in fighting a looming recession.

Dornbusch believes such policy options give the present economic boom the prospect of continuing years more.

Source: Rudy Dornbusch (MIT), "Growth Forever," Wall Street Journal, July 30, 1998.


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