A while back, prompted by a comment on this blog, I read the Paul Krugman book, End This Depression Now! He argues that a large Federal stimulus is needed to push the economy out of the doldrums and get people working again.
I agree with some of his premises:
- The economy is in a liquidity trap: even after driving interest rates to zero, there is insufficient demand to support full employment.
- One of the immediate causes of this liquidity trap is that everyone is trying to save and get out of debt at once. Production, in and of itself, is pointless without consumption.
- The Federal government has room for more deficit spending before the danger of inflation sets in.
- A small amount of inflation might actually be a good thing, as it means that debts would be repaid with cheaper dollars.
So let’s borrow (it’s OK, it’s from the Federal Reserve, who will never ask to be repaid) and spend a couple of trillion dollars to boost the economy! Right?
Alas, I don’t think so.
- Between existing government programs and the Federal Reserve’s ongoing quantitative easing, we’re already loosing trillions of dollars into the system, with nothing useful to show for it.
- A Keynesian government stimulus is supposed to vary with the overall state of the economy, to fill in for ‘missing’ consumer and industrial demand. But we’ve had the spigots stuck on ‘wide open’ for years, blunting the effect of additional stimulus.
- Historically, before we tried to regulate the economy, we had cycles of boom and bust. The busts, although painful, served a necessary purpose, as they forced people to reallocate resources from useless endeavors into useful ones. But our economy has gotten to the point where it runs on useless endeavors. Republicans rail at pointless government regulation, and to some extent they’re right. But millions of jobs and billions of dollars are invested in such pointlessness. (Not that all government regulations are pointless: one of the further difficulties is recognizing the pointless ones.) Reallocating away from such efforts will require an agonizing re-appraisal, which will get worse the longer we put it off.
- One of the main causes of our employment problems is that employers, in the name of cost-cutting, have turned away from actually employing people, as far as possible. If you can get a machine to do the work, so much the better. Failing that, outsource it, leaving the dirty work of actually hiring people to others. (And if those people are outside the US, it doesn’t matter.) I can’t see how a renewed government stimulus will change this trend.
- One of the practical purposes of deficit spending is to tide people over until the economy begins to grow again. It’s not clear when, or if, that will actually happen. There is no job fairy waiting for us to change policies.
Alas, I’m back where I started. I don’t believe the government can ‘fix’ the economy. The best it can do is to invest in infrastructure, but this will not magically get the rest of the economy buzzing. Under these circumstances, the best thing for the government to do is to try to moderate its deficits by raising taxes and cutting spending, to prepare for a future eventuality more dire than our current circumstances.