By Richard Cohen and Barry Jagoda
Republican conservatives continue to fume over the probability that Congress will approve another increase in the nation’s debt limit by the deadline of Nov. 3. And the GOP candidates for President continue their focus on less government, all arguing for big cuts in federal spending. But this represents a complete misunderstanding of macroeconomics.
In all of modern history the most effective tool for repairing a national economy has been more targeted government spending. Central government spending is also the best way to reduce the national debt because current and future public investments will rapidly be paid back through the natural increase in tax revenues from a newly strong economy.
Many economists are attracted to the idea of increasing federal spending for worthwhile projects, especially when a nation’s economy is in a slump. The right kind of federal spending not only can pump needed fuel into the economy but will result in long-term benefits to society, such as new and improved roads, bridges and other critical infrastructure.
The current national challenge is to get conservative political leaders to understand this counter-intuitive approach. Probably the best testimony that deficit spending works is that the economy is finally picking up—haltingly, but steadily. Reducing government spending now will short-circuit the recovery. President Obama’s just released budget does call for more federal stimulus but not enough.
The theoretical basis for this strengthening comes from the work of the British economist John Maynard Keynes whose focus is on “aggregate demand,” depending not only on the private sector but also on government to build up the economy. “Demand”can be controlled by federal spending when private enterprise lags.
According to Keynes, within a short time, public and private economic activity will reward a country many times over and will automatically increase tax collections and thereby rather quickly begin to reduce the federal debt.
Why is federal deficit spending seen as such a taboo? Nobel prize-winning economist Paul Krugman, a leading Keynesian, says, “Fiscal fear mongering is a major industry inside the Beltway, especially among those looking for excuses to dismantle Medicare, Medicaid and Social Security. People whose careers are heavily invested in the deficit-scold industry don’t want to let evidence undermine their scare tactics.”
In his first term President Obama, very much aware of the power of Keynesian theory, asked his economic team for a federal “stimulus” plan. His advisors argued among themselves and, with an eye out over what was thought to be concerns of the electorate, came up with federal spending that was later seen as about half of the amount necessary to get the economy rolling in a fundamental way. This mini-Keynesian contribution made a dent in the weak economy but not nearly enough was spent to reach the level of demand required. Now there is another chance.
The basic American economic problem is a lack of demand. American consumers and businesses aren’t spending enough, and efforts to get them to open their wallets have gone nowhere. The solution: The federal government needs to step in and spend. A lot. On debt relief for struggling homeowners; on infrastructure projects; on aid to states and localities; on safety-net programs. Call it “stimulus” if you like. Call it Keynesian economics. Whatever you call it, it worked in the late nineteen-thirties and forties, when the U.S. government started shelling out on the military in the build-up to World War II, bringing an abrupt end to years of economic misery and laying the foundation for decades of prosperity.
Conventional wisdom in Washington has been for “austerity” — throttle back on government spending, tackle the budget deficit now — as the way to get the economy back on track. Not only is this wrong, it’s making a bad situation even worse. Krugman writes: “Now is the time for the government to spend more, not less, until the private sector is ready to carry the economy forward again.”
Republicans fear government debt almost as though the overages were similar to going into household debt. Students in first year economics are taught that this is the “fallacy of composition,” mistaking what might be consequential for a home budget or even planning in business with the opportunities and issues for a national budget and management plan. Sometimes it seems that none of the conservatives in Congress found time for basic economic study, or they have forgotten the fundamental teaching. 2015 is a very good time to test Keynes whose theories should get America back on the right economic track.
Richard Cohen is a business executive and entrepreneur. Barry Jagoda is a San Diego-based journalist and international consultant.