Defecit Spending

[one...two...tree 2,762]

Paul Krugman in the NYT:

"While the manic-depressive stock market is dominating the headlines, the more important story is the grim news coming in about the real economy. It's now clear that rescuing the banks is just the beginning: the nonfinancial economy is also in desperate need of help. And to provide that help, we're going to have to put some prejudices aside. It's politically fashionable to rant against government spending and demand fiscal responsibility. But right now, increased government spending is just what the doctor ordered, and concerns about the budget deficit should be put on hold. (...)

There's a lot the federal government can do for the economy. It can provide extended benefits to the unemployed, which will both help distressed families cope and put money in the hands of people likely to spend it. It can provide emergency aid to state and local governments, so that they aren't forced into steep spending cuts that both degrade public services and destroy jobs. It can buy up mortgages (but not at face value, as John McCain has proposed) and restructure the terms to help families stay in their homes.

And this is also a good time to engage in some serious infrastructure spending, which the country badly needs in any case. The usual argument against public works as economic stimulus is that they take too long: by the time you get around to repairing that bridge and upgrading that rail line, the slump is over and the stimulus isn't needed. Well, that argument has no force now, since the chances that this slump will be over anytime soon are virtually nil. So let's get those projects rolling.

Will the next administration do what's needed to deal with the economic slump? Not if Mr. McCain pulls off an upset. What we need right now is more government spending -- but when Mr. McCain was asked in one of the debates how he would deal with the economic crisis, he answered: "Well, the first thing we have to do is get spending under control."

If Barack Obama becomes president, he won't have the same knee-jerk opposition to spending. But he will face a chorus of inside-the-Beltway types telling him that he has to be responsible, that the big deficits the government will run next year if it does the right thing are unacceptable.

He should ignore that chorus. The responsible thing, right now, is to give the economy the help it needs. Now is not the time to worry about the deficit."

Paul Krugman doesn't need any validation from me, but: he's exactly right. I have been horrified by the number of people who have said that now would be a good time for us to cut back on government spending. This is crazy. I mean: under normal circumstances, I am a deficit hawk. (Even now, I think it's a great time to go through the budget and eliminate pointless and wasteful subsidies and programs.) But these are not normal circumstances. We are heading into a serious recession. We need to do what we can to get the economy moving again. And fiscal stimulus is exactly the way to do this.

Saying that we need to cut back on spending at this point is like saying to someone who has just been diagnosed with a treatable form of cancer, and to whom people are willing to lend money: look, you've just spent a whole lot of money on the operation to remove your tumor; you just can't afford the chemo and radiation that your doctors recommend. Time to tighten your belt! Time to retrench!

To which the obvious answer is: putting my plan to buy a new car on hold is one thing. But saving money by not going through chemo and radiation is insane. This is exactly the same. And when debate moderators ask questions like this:

"What are you going to have to give up, in terms of the priorities that you would bring as president of the United States, as a result of having to pay for the financial rescue plan?"

The appropriate response is: we are going to have to get our budget deficits under control. But this is absolutely the wrong time to do it. We need to get through the present crisis first.

I especially do not want to hear about the need to stop spending from anyone who favored the Bush tax cuts. Anyone who favored running deficits in good times for the sake of tax cuts that overwhelmingly benefitted the rich has no standing whatsoever to object to desperately needed stimulus when we're heading into the most serious recession most of us can remember. Anyone who supported the Bush tax cuts cannot credibly say that she objects to deficits per se. Nor can she say, as I do, that she favors fiscal responsibility in general, but thinks that there are circumstances in which something else takes priority: there is no credible economic theory that I'm aware of that says that we should run deficits when times are good.

The only reason to favor the Bush tax cuts but oppose deficit spending now is because the Bush tax cuts overwhelmingly favored the wealthy, whereas the most effective forms of economic stimulus tend to be directed more towards the poor and the middle class. But that's no reason at all.

This is not rocket science. It's bog-standard Keynesian economics. People who comment on economics and politics should either make some effort to understand it or hold their peace.

http://www.washingtonmonthly.com/

[Heracles 417]

I never heard much about this guy before let alone his views but have I not been saying this all along:

Keynes argued that the solution to depression was to stimulate the economy ("inducement to invest") through some combination of two approaches :

* a reduction in interest rates.

* Government investment in infrastructure - the injection of income results in more spending in the general economy, which in turn stimulates more production and investment involving still more income and spending and so forth. The initial stimulation starts a cascade of events, whose total increase in economic activity is a multiple of the original investment.[1]

Why so many here don't get this is beyond me. China, Dubai, Developed Asia, Australia gets it. Why not the US..

Edited October 17, 2008 by Aficionado

[Heracles 417]

This guy is a genius. Instead of wasting $700 billion on bailouts, can you image the jobs that would create if put into infrastructure projects.

Edited October 18, 2008 by Aficionado

[one...two...tree 2,762]

This guy is a genius.

John Maynard Keynes? Yes, he was.