Should governments spend their way out of the recession?
The world is fast approaching an economic collapse that would rival the Great Depression of the 1930's. The market, on its own, has appeared to be a dismal failure in halting decline. This has strengthened the case for once taboo massive governmental fiscal intervention. Should governments spend their way out of the recession?
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Government spending is the only way to increase much needed consumption
Astute observers of the economy (like Nobel-laureate Paul Krugman) note that we are currently experiencing a liquidity trap. Essentially, the theory is that macroeconomic factors have rendered impotent monetary policy as a tool for increasing aggregate demand in the economy. The theory, supported by data, is that interest rates can go no lower (while the nominal rate is 2% in the US, the real rate is somewhere near zero) and that the money purchased at low rates is then pushed into savings rather than consumption. The only way to kick start the economy is to use fiscal policy to stimulate demand. Fiscal policy has the advantage of actually putting money where it needs to be—the government has the ability to attach strings to free money that mandates that it be spent on consumption. The added revenue will maintain pre-crash levels of demand allowing businesses to operate at capacity and stem the threat of layoffs which result in the deadweight loss associated with finding new jobs. Empirical precedent indicates that this is the most successful course of action. The New Deal policies of FDR (basically massive fiscal stimulus) resulted in economic growth back in the direction of full capacity; in 1937, the rate of growth dropped significantly when FDR decided to pursue a more fiscally austere approach aimed at balancing the budget and curtailing the printing of money to avoid inflation. World War Two reversed this trend by requiring massive fiscal spending (and consequent increase in the GDP). (1)
(1) Most of the aforementioned points are based on some superb summary graphs by Brad DeLong: http://delong.typepad.com/sdj/2008/11/post-world-war.html
The US government is currently spending incredible amounts of money and we have not seen a consequent increase in GDP. In order to get the economy to post pre-crash levels of growth, the government would have to spend hundreds of billions of dollars. Given that the fundamental problem of the economy is related to risk management (i.e. firms leveraging their balances with very risky assets that have lost a great deal of their value), it is unclear how spending would solve this problem in the long term. It should be noted that while providing subsidies is as easy as signing a check, creating an effecting regulatory scheme requires significantly more effort. It is very probable that fiscal stimulus will reduce the incentive for reform during the period of fiscal expansion, leaving the problem unresolved by the time governments run out of money.
Government spending can be targeted, while private spending cannot
The current global economic recession is the result of very specific causes which are transparent to market observers. This allows regulators the ability to subsidize the areas of the economy that would provide the greatest prospect of growth. Alternatives that rely on the private market cannot account for the behavior of individual consumers. Measures like tax breaks and stimulus checks may see a diversion of more income into savings which will not address the need for greater consumption in the short term. Further, government has the benefit of vast information networks (statistical bureaus, employed economists, robust demographic databases) that can respond in a dynamic fashion; on the other hand, private consumers and businesses tend to have sticky preferences that do not change unless the market has given sufficient signals (i.e. it takes awhile before consumers notice the incremental increases in prices, or decreases in quantity per package of, say, cereal).
The fact that the government has the power to indicate where it will allocate resources is a frightening, rather than heartening, fact. It is no secret that the government tends to subsidize those industries in which they have a vested interest. For example, developed nations across the globe maintain ludicrously high levels of agricultural subsidies despite the disastrous effect on the global impoverished. Recently, domestic automakers in the US have requested a "bailout" from the government—and policy makers are listening not because they have a good case, but because they have spent millions of dollars on lobbying and they are fortuitously located in many swing states. It is no surprise then that these companies remain unprofitable while paying their workers over one-third of what their equivalents working for foreign-owned auto makers do, all the while creating inferior products. Fiscal spending is most likely to go to those businesses that have the resources to grab the ear of a representative. This is especially distressing considering one of the main engines of growth in developed economies is the group of small businesses that have both the flexibility and incentive to pursue entrepreneurial venues. Larger companies (who also have the resources to devote to lobbying) often have institutional barriers to change (older management resisting the changes requested by the new, employee unions which make firing costly, loyalty to corporate boards, etc.).
Just an observation
Who has not read somewhere at some point claims that the level of consumption in industrialized societies is far above that which is sustainable for the global environment. So it is perhaps a miracle that these levels of consumption will be suddenly curtailed. Yet in the short term people need to eat and have a place to live. So something needs to be done. What is really annoying is that the causes of these events have been pointed out for a long time. What ever happened to the saying an ounce of prevention is worth a pound of cure. My solution would be to throw everyone in the US in to prison and then ask the Cubans and Venezuelans and Iranians and Vietnamese and Nicaraguans and Haitians and Angolans and Gambians and Iraqis and Indonesians and Chileans to come and guard the prisons.
(Say I had clicked on the No point. Why did it come up on the yes side?)
See the mis positioned yes point above.
There are many reasons that everyone in the US, over 18 years of age, should be put in prison.
What do you think?