Contracting Government Is Not the Answer

Have you gotten tired of talking about the economy yet?  Tired of listening to me talk about it?  If so, you might as well either gird your loins and be prepared for me to continue beating an almost dead horse or head for the hills.  It's too important not to talk about and since the right will continue to throw out false arguments about what happened during the Great Depression and how we can't turn to government spending to get us out of this situation, I'm going to keep a stream of information coming from respected sources to combat the distortions from the right.  Because we need our government to act aggressively in the face of this recession in order to keep from getting mired in it for a long time. 

Nobel Prize Winning Economist (and yes, my hero, in a cyber-junky sort of way) does a great job of making the situation clear to people like me with a passing interest in economics and to people with no inclination in that direction.  According to him, we're in a special situation where the Fed can't lower interest rates any further to warm the economy back up and the private sector is either unwilling or unable to crank things up either.  We can tighten up fiscal policy, contract government and try to hair-shirt our way through the crisis (which will only prolong it) or we can open up the federal purse and spend some money on infrastructure and other priorities that we need to address anyway.  Government spending will provide jobs, create national wealth by improving our infrastructure and hopefully lay the groundword for more intelligent and sustainable growth in the future (this last may be a pipedream for me and few others). 

Whatever we decide to do, it won't be painless but if we are smart about it we can wind up with a shorter recession and with a stronger infrastructure at the end of the day.  Krugman's words are on the other side (Deficits and the Future):

The idea that tight fiscal policy when the economy is depressed actually reduces private investment isn’t just a hypothetical argument: it’s exactly what happened in two important episodes in history.

The first took place in 1937, when Franklin Roosevelt mistakenly heeded the advice of his own era’s deficit worriers. He sharply reduced government spending, among other things cutting the Works Progress Administration in half, and also raised taxes. The result was a severe recession, and a steep fall in private investment.

The second episode took place 60 years later, in Japan. In 1996-97 the Japanese government tried to balance its budget, cutting spending and raising taxes. And again the recession that followed led to a steep fall in private investment.

Just to be clear, I’m not arguing that trying to reduce the budget deficit is always bad for private investment. You can make a reasonable case that Bill Clinton’s fiscal restraint in the 1990s helped fuel the great U.S. investment boom of that decade, which in turn helped cause a resurgence in productivity growth.

What made fiscal austerity such a bad idea both in Roosevelt’s America and in 1990s Japan were special circumstances: in both cases the government pulled back in the face of a liquidity trap, a situation in which the monetary authority had cut interest rates as far as it could, yet the economy was still operating far below capacity.

And we’re in the same kind of trap today — which is why deficit worries are misplaced.

Comments

[amy]

You know, the word 'infrastructure' makes Rachel Maddow all tingly. One of the many reasons I love her.

But enough of my fawning on people who are not you - I keep hearing about Japan in the 90s as an analog for what we're going through. Do you know of any books that have been written about that period?