Why Real Deficit Hawks Support Stimulus Spending
Most of the world's economies are in a trap. Unemployment is painfully high, but businesses are reluctant to expand -- and hire -- until their sales start increasing. But sales can grow only slowly, if at all, until unemployment starts to fall. D'oh.
The basic argument for stimulus spending (i.e. federal purchases of goods and services deliberately financed with borrowed money) is that it will increase sales directly (buying stuff) and indirectly (hiring people, who then buy stuff). Businesses will respond by expanding, hiring more people, who will buy more stuff. If this happens enough, the recovery becomes self-sustaining: the virtuous cycle, in which business expansion leads to more business expansion, can continue even as the federal deficit is reduced.
Here's the problem: getting a recovery to the point of being self-sustaining is a little like getting a rocket to escape the earth's gravity. You have to burn enough fuel, at a fast enough rate, and for long enough, for the rocket to attain escape velocity. If you don't burn the fuel fast enough, the rocket barely gets off the ground. If you stop burning too early, the rocket falls back to earth. Thud. In either case, you're right back where you started, except that you've burned a lot of fuel.
So if you care about how much fuel you're going to use (and you're not satisfied leaving the rocket languishing on the launch pad as the astronauts slowly starve), what you want to do is burn a whole lot of fuel, very fast, for long enough to reach the goal. What you don't do is skimp on fuel or cut the motors early...because you'll just have to start all over again. And again. And again. You can, in fact, burn an unlimited quantity of fuel in this manner, without ever getting the rocket into orbit. Which is not a bad metaphor for what's happened to Japan's economy over the last couple of decades.
Japan has managed to run up a huge public debt over the last twenty years, without ever really recovering from its recession. And a repeat of the Japan experience is basically the worst-case outcome for the U.S. national debt. But it seems that this is exactly the course that policy-makers intend to pursue. If this doesn't turn around sharply after the mid-term elections, we could be in for decades of grinding unemployment and relentlessly accumulating debt. The worst of all possible worlds....
The basic argument for stimulus spending (i.e. federal purchases of goods and services deliberately financed with borrowed money) is that it will increase sales directly (buying stuff) and indirectly (hiring people, who then buy stuff). Businesses will respond by expanding, hiring more people, who will buy more stuff. If this happens enough, the recovery becomes self-sustaining: the virtuous cycle, in which business expansion leads to more business expansion, can continue even as the federal deficit is reduced.
Here's the problem: getting a recovery to the point of being self-sustaining is a little like getting a rocket to escape the earth's gravity. You have to burn enough fuel, at a fast enough rate, and for long enough, for the rocket to attain escape velocity. If you don't burn the fuel fast enough, the rocket barely gets off the ground. If you stop burning too early, the rocket falls back to earth. Thud. In either case, you're right back where you started, except that you've burned a lot of fuel.
So if you care about how much fuel you're going to use (and you're not satisfied leaving the rocket languishing on the launch pad as the astronauts slowly starve), what you want to do is burn a whole lot of fuel, very fast, for long enough to reach the goal. What you don't do is skimp on fuel or cut the motors early...because you'll just have to start all over again. And again. And again. You can, in fact, burn an unlimited quantity of fuel in this manner, without ever getting the rocket into orbit. Which is not a bad metaphor for what's happened to Japan's economy over the last couple of decades.
Japan has managed to run up a huge public debt over the last twenty years, without ever really recovering from its recession. And a repeat of the Japan experience is basically the worst-case outcome for the U.S. national debt. But it seems that this is exactly the course that policy-makers intend to pursue. If this doesn't turn around sharply after the mid-term elections, we could be in for decades of grinding unemployment and relentlessly accumulating debt. The worst of all possible worlds....