Posts Tagged 'deficits'

Stimulus vs. Spending and the need for Recessions

Over on dagblog, one of our writers DF posted an interesting post on the latest drama in our economic crisis called ‘Macroeconomics 101: Spending versus Stimulus, or ‘How I learned to stop worrying and love recession.” It basically discussed how silly some of the recent political commentary has been, particularly the claim by many Republican lawmakers that Obama’s stimulus package was full of programs that would do little to stimulate the economy. This is my response. I encourage everyone to read DF’s original post as there is also a fair amount of continued dialogue in the comment section.

So DF did a stellar job of getting to the heart of our economic crisis and the current debate over Obama’s planned stimulus package and spelling it out simply and effectively. I do, however, have some issues with his thesis.

Unlike DF, I believe there IS a difference between stimulus and pure spending, although where and how you draw that line is admittedly a subjective process. Stimulus is government spending that then encourages corporations and/or individuals to spend money of their own as well. Government spending by itself will certainly add to GDP, but without a stimulative component, it will have very little notable impact (the Consumer ‘C’ in GDP is almost 2/3ds of the total in the US) and certainly will be unlikely to reverse a recession.

Now you can have a legitimate debate about what types of policies are more stimulative than others, and that’s where things get subjective (for instance, giving people money, or tax refunds, would seem by its nature to be stimulative but that stimulus package last year ended up being nothing more than an ineffective short-term stopgap with most of the money going to shore up corroded balance sheets – not the worst thing in the world but not very stimulative).

And where I really disagree with you is that you seem to think government is in a better position to spend than consumers or corporations. With consumers, maybe you could argue the point, given how badly household balance sheets have gotten, but aside from the financial industry, corporate balance sheets are actually in very good health and they could probably invest a lot more capital in the system if they had confidence (and arguably lower tax rates).

Of course, any significant corporate investment also requires a free flowing credit system, which has been dramatically impaired because of our financial crisis. Resolving our toxic asset problem is at least as important as the passage of any stimulus package because not only would it allow credit to flow again (although hopefully in a more rational manner) it would also restore a bit of the confidence that is a necessary prerequisite for any lasting spending by consumers OR corporations.

But getting back to the government and its ability to help us spend our way out of this mess …. they’re in the worst shape of anybody to do the work! Obviously, the government CAN spend the money since they control the printing press, but that won’t mean it’s a good idea. At $1.2 trillion dollars (prior to any stimulus plan being passed), this year’s U.S. deficit alone equates to over $4000 per person in this country, and that exceeds the average credit card household debt of $3,235 (which you can easily argue is too high as well).

Increasing the deficit will only place a bigger burden on this country’s future generations – at some point, guess what, the Chinese and other foreign governments will stop wanting our debt because they’ll wake up and notice the crappy state of the balance sheet, and at that point, you will see and feel pain like you’ve never experienced.

If we are spending money on things that are needed, like long-decaying infrastructure or intriguing alternative energy technologies, then perhaps the additional onus on the country’s balance sheet will make sense. But I am very skeptical that we’ll be able to spend $800 billion without seeing much of it going to waste.

I guess when you get down to it, I have a problem with your main thesis

First, we all have to agree that a recession is what I’ve stated it is above and that this is an undesirable condition in which we all have a vested interest of avoiding.

Recessions are necessary parts of the free market business cycle. Sure, we’d love to avoid or shorten them, but it’s my belief that without them you can’t have the good times. The key in my opinion is to pursue policies and regulations that limit the extremes on both sides of the cycles, but unfortunately, we threw ourselves one big consumption and credit orgy over the past decade, and we must pay the piper.

We need to be very careful we don’t throw good money after bad, and make the problem even worse by sapping oomph from any eventual recovery or setting us up for a bigger, more painful fall later.


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