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Halting the Fall

An economic slowdown will have an uneven effect across the country, posing interesting options for the new president

January 07, 2001|David Friedman | David Friedman, a contributing editor to Opinion, is a Markle senior fellow at the New America Foundation

Last week's surprise interest rate cuts by the Federal Reserve and President-elect George W. Bush's downbeat economic summit underscored post-boom America's potentially steep downside. Yet, much like the end of the 1980s bubble economy, a slowdown will more likely affect the same Northeastern and West Coast urban areas that suffered the most during the 1990-92 recession. Given that his support is overwhelmingly drawn from other, more economically vibrant regions, Bush's most savvy option may be to do as little as possible about a looming recession until it has discliplined those areas most opposed to his politics.

Since the 1980s, the United States has been split among faster-growing states that encourage relatively well-balanced economies--Texas, Arizona and Georgia--and states--New York and California--that bet far more heavily on service-sector, white-collar professional development. When financial bubbles pop, the least-diversified communities disproportionately suffer.

Just five slow-growth states--California, New York, Connecticut, New Jersey and Massachusetts--accounted for nearly 70% of the nation's total job losses in last decade's recession. In contrast, during the same period, employment growth slowed but never actually fell in 24 fast-growing states. Take away the Northeast and California, and the 1990-91 recession never occurred.

The "new economy" boom amplified the gap between the nation's slow- and fast-growth states. Rather than learn from their setbacks in the last recession and diversify their economies, slow-growth states were seduced by get-rich-quick, Information Age hype. From Manhattan to the San Francisco Bay Area, once-troubled urban areas tailored their zoning, labor, land-use and business-development policies to almost exclusively foster dot-com millionaires and a virtual economy.

As long as rising stock values boosted high-end individual wealth, this strategy seemed a smashing success. Tax revenues soared, and unionized public employment expanded, masking blue-collar declines in the private sector. Politically influential developers celebrated soaring upscale-urban real estate values. Post-material urban NIMBY (not in my backyard) groups indulged their fantasy that they could live in coffee-shop opulence without having to experience such distasteful activities as actually making things or generating the power they used. New York declared itself the City of the Decade. A dot-com bookseller was named Time magazine's Person of the Year.

The stage was set for a reprise of the 1990s recession. Once again, financial speculation grossly inflated living and business costs in the nation's least-diversified, slowest-growing communities. Such areas are now especially ripe for a painful setback.

President George Bush's inability to deal with the country's regional reactions to recessions helped pave the way for Bill Clinton's election in 1992. The former president understood that the economy was not as bad as his opponent claimed, but he failed to distinguish the few troubled states from the rest of the country. As job losses mounted in mediagenic New York and Los Angeles, his apparent indifference may have cost him a second term.

Now it's George W.'s turn. Can he better manage the political pitfalls of the country's strikingly uneven economic fortunes?

The most intellectually honest policy would be to tackle the root cause of the problem: the anti-growth elitism that makes California, the Northeast and similar urban areas so vulnerable to speculative volatility. As long as regulatory and political caprice increases the risk of all but a select group of activities, like the dot-com mania, slow-growth regions will continually foster a boom-and-bust economy.

This means, however, constraining the unlimited power enjoyed by the country's most vocal, privileged and well-organized urban elites, which would sooner embrace evangelical religion than give up their perquisites. Unless the groups harmed by the urban status quo, such as the urban working class, lend support, the Bush administration would gain little, except virulent criticism, fighting to regularize the environmental, land-use and tax policies that hamstring the nation's least-competitive regions. Poorer urban voters, of course, recently rejected the president-elect by remarkably lopsided margins.

Alternatively, Bush might try to prop up inflated new-economy assets like high-end real estate or technology stocks with tax and interest-rate cuts. That's exactly what the Japanese attempted to do when their economic bubble burst in the late 1980s.

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