Pay Me My Money Down – Bruce Springsteen
So the stock market is collapsing, credit is virtually impossible to get, and a recession looms. And in several debates this series of facts has led the moderator to demand an answer about what spending programs will have to be cut in these hard times.
To his credit, Obama at least partially rejected the premise of this question by pivoting to talk about the importance of programs to get the economy rolling like green jobs and better health care. Unfortunately, commentators were only too happy to portray this as a refusal to answer a legitimate question. Which suggests that more work needs to be done, in a very explicit fashion, to correctly identify the nature of the problem.
This is further demonstrated by McCain’s repeated insistance on referring to the situation as a “fiscal crisis” rather than a “financial crisis.”
Ezra Klein neatly sums up the situation:
Second, the underlying presumption here is that during a recession, faced with heavy spending, the president will have to cut his investment agenda. It makes a certain amount of intuitive sense. In hard times, families cut back. But the government is not a household. In hard times, it should spend more in order to stimulate the economy. That’s part of the utility of having a government: When consumers and businesses fall on hard times, they cut spending. Which cuts demand. Which cuts economic activity. Which deepens your recession. All that is a Bad Thing. So it’s useful indeed that we have an institution able to amp up deficit spending in order to increase demand.
In short, it’s a false premise for a silly question. The problem right now is not (despite McCain’s best efforts to talk about earmarks until he’s blue in the mouth) a matter of too much federal spending. If anything it’s a situation which demands increased spending by the government in an effort to prime the pumps and get some cash flowing.
This was the stated purpose of the $600 bucks most everyone got in the mail a few months back. But the problem with that kind of stimulus is that it funnels a relatively small amount of money to a lot of individual people, but can do nothing to ensure that those people put it back into the economy. Now, it certainly was welcome for a lot of people who were having trouble making ends meet. But for the larger goal of “stimulus” it could only have a marginal effect.
That’s why the policies that Obama is supporting (and which the debate moderators keep demanding that he scale back) are precisely the kinds of programs that will do the most good.
The worst thing that can happen in the economy right now is for people to get nervous, stop spending money, and let the gears grind to a halt. But it’s risky to put your money out there right now, which creates a collective action problem where every individual makes a rational choice to hold tight but the end result is a deepening recession. That’s a perfect place for the government to step in and invest in some short-term infusions of money into green energy markets, education, etc. that will unlock the economic stasis and get some money circulating. It’s a big part of what eventually dragged us up out of the Great Depression, and it’s what should happen now, too. At that time, too, there were plenty of people insisting on governmental austerity in the face of the crisis – which would be made a disastrous situation even worse.
Which is not to say that government spending is an intrinsic good or anything. Obviously, judicious decisions must be made about what will work well, and what won’t. But we need to start from the premise that spending – correctly directed – is essential for any strategy of getting past the financial crisis. And yes, this will necessitate cutbacks in the long term. As the economy begins to recover, we have to be willing and able to put the brakes on government spending in order to make it clear to markets that deficits can be walked back. This dynamic played a huge role in the 90s economic boom, after all.