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U.S. must invest in education, MIT economist says.

The United States must seek export markets in Latin America, forge a new trade policy with Japan and, above all, greatly increase investment in education to build a competitive economy, Massachusetts Institute of Technology professor Rudi Dornbusch told delegates to the Congress of Cities.

Dornbusch, who spoke on the United States in the world economy, stressed the role low interest rates play in recovery and predicted the current recession will last at least another five years.

"We're paying the price for the '80s," he said of the current climate of reduced consumer spending, fear of unemployment and high personal indebtedness.

Neither an expansion nor tax cuts are perceived by the public as solutions, Dornbush said, calling current proposals for middle class tax cuts, and the expected consumer spending that will ensue, the "wrong answer for America today."

He cautioned that every post-World War II expansion has been "murdered" by the Federal Reserve tightening money. Also, a major fiscal expansion might cause interest rates to rise.

Rather, the nation should focus on building a competitive economy.

"With fiscal policy not there to help, or at least not in a constructive fashion, monetary policy is the only thing we have, and the Federal Reserve has to move much more aggressively," Dornbusch emphasized.

He predicted the Federal Reserve will cut interest rates by as much as a full percent after seeing weak Christmas sales, as it will be held responsible for any worsening of the economy.

Failure to act keeps up talk of fiscal expansion, and in turn, interest rates, which contributes to halting the recovery.

"Low, low interest rates is the only good news," Dornbusch said, predicting they will remain so for the next half-decade, thereby increasing consumer confidence and access to credit for the lower-income while restoring the balance sheets of the middle class.

This may bring moderate growth, he said. "A fiscal expansion by no menas."

These low interest rates, in comparison to those of other countries, will also cause the dollar to decline substantially and create price competitiveness for American-manufactured goods exported abroad.

Beyond that, Dornbusch said, we must look at opportunities for American businesses to compete in the world economy. He noted domestic manufacturers had lost all of their cost competitiveness by the ened of the 1980s.

He called for the opening of Latin American markets and said a free trade agreement with Mexico is "highly essential."

Despite fears such an agreement will cause jobs to be lost to Mexico, the favored trade status Mexico has enjoyed during the past few years has brought growth in exports, creating 500,000 new jobs.

If free trade with Mexico comes, he said, similar agreements with other Latin nations will follow by the turn of the century, opening a huge, new captive market.

That, not hanging onto a textile industry staffed mainly by illegal aliens, is what will keep communities growing, Dornbush said.

He discouraged investment in Eastern Europe due to its relatively small size and proximity to Western Europe.

Any free trade agreement must be accompanied by a major, aggressive retraining program, not just for those displaced by trade, but also for those displaced by relocation and technology. If not, he said, "the social confrontation in the end is inevitable."

"Unless we do the education job, we have absolutely no hope of maintaining America at the current standards of living," Dornbusch said. He sees the advent of free trade with Mexico an opportunity to implement adjustment programs.

Japan poses the greatest problem. After 35 years, imports remain at three percent, and negotiation has been little help in opening closed markets.

Dornbusch said Japan must be told to open its markets to continue to sell in the United States.

We should be open to Japanese investment in American manufacturing, though, because it will help us develop good jobs and ultimately sell products abroad.

Education is the most important component in the rebuilding of America, he said. "The only thing we can do is very radically and very rapidly invest in education."

"There is absolutely no God-given right for Americans to have high wages and not to earn them, and that reality is catching up ... even at the high-wage end," Dornbusch said.

Beyond increased funding, the solution entails personal involvement on the part of the president. Above all, "families and local authorities have to become very, very much into the act and have to say being 'all right' is not good enough."
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Title Annotation:Rudi Dornbusch of the Massachusetts Institute of Technology
Author:Turner, Laura
Publication:Nation's Cities Weekly
Date:Dec 16, 1991
Previous Article:'Let's go get the money!' (The Workplace and Solutions to Rebuilding America)(address by Jesse Jackson at the National League of Cities' Congress of...
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