Opinions are fun. My friends tell me I am someone with lots of opinions
and that's fine since I don't get mad at others when they disagree with me. In this same spirit I am interested
in hearing yours views as long as you are able to share your views without boiling over. I look forward to hearing from you.
I tend to write in the form of short essays most of the time, but contributions do not need to be in this same format or size.
Some of the content here will date itself pretty quickly, other content may be virtually timeless, this is for the reader to judge.
Displaying 1 - 1 of 1
Maybe we should be spending?
Posted at: Jul/11/2011 : Posted by: mel
Related Category: Economics, Politics & Gov,
I can’t begin to guess the number of times I have channel surfed in recent months only be barraged by either “You can’t spend your way out of a recession”, or “you can’t borrow your way out of debt.” In our modern era of rapid fire media, both lines make excellent “sound bites”, but I am beginning to question how relevant either line is despite being very clever. The more I ponder this, the more I begin the question the validity of either statement.
One of the most common definitions for a recession is a decline in spending and income. Hey, that means that an increase in spending is the opposite of a recession.
Back in the 1930’s an English Economist name John Keynes proposed a controversial theory for how an economy works. In general terms he said that money flows in circles. The money one person spends becomes the earnings of another’s, and when that person spends, it becomes the next persons earnings. This cycle would effectively become a big circle. This notion was not new, and in fact had been discussed by Adam Smith 200 years earlier. Unfortunately, when times get tough people’s natural reaction is to hoard what little money they may have. In Keynes theory, when this circular flow stops due to hoarding, the economy comes to a standstill. That sure sounds like a definition of our current situation.
The solution that Keynes proposed to this dismal situation was that government should “prime the pump.” This priming could be done by either having the government increase the money supply or by actually buying goods and services from the private sector. Most text books say that the massive defense spending initiated under FDR helped to bring this country out of the Great Depression of the 1930’s.
The Keynesian approach is in direct contradiction to “Laissez-fair capitalism” promoted by the purest. In Laissez-fair capitalism, left to its own, a free market will find balance and ultimately grow through the competition that follows balance.
Another key economic theory comes from Adam Smith who in 1776 published “The Wealth of Nations.” Adam Smith’s theories are considered the foundation of modern capitalism. He added two key elements to the notion of an economy. First: he stated that individuals can create wealth. You could farm something in your village that is of little of value locally because everyone is a farmer and grows it in their own fields. If your product is desired enough by others you can transport it to another village or larger city and people will pay you handsomely for you goods, and this creates wealth. Second: he stated that ordinary people are not focused on their countries economy or economic health. Instead he proposed that people are focused on creating their own economic wealth. By extrapolation, if enough people are allowed to create individual wealth and economic activity, their community and their nation will enjoy economic activity and wealth.
Economists prognosticate one theory or another passionately in defense of their honorariums. I don’t actually care; I just worry that by the time my kid’s graduate school the U.S. economy may be no better off than it currently is. Obviously, there is value to borrowing pieces from each theory. Clearly, while money flows from person to person, wealth is created, but the psychology of hording is also present in tough times. The big difference to me is that Keynes purports that the government has a stake and a role in the economic lives of individual citizens.
The Keynesian model dominated the U.S. economy in the post WWII years of 1945 – 1975. During those 30 years, the private sector was the largest piece of the economy, but government sector spending and projects was an every present chunk. During the next 20 years government spending moved from goods and services such as roads and military to entitlement programs and medical care.
I am beginning to think that Keynes’s may have had a good point. It is probably time for government to prime that economic pump. At this point someone should be mentioning the economic stimulus package Congress enacted in 2010. It is pretty clear to me that the stimulus package, while anemic, did create some economic energy before fizzling out. I am not in truth sure that any actual work got done with this money. This does not mean the idea was bad; rather it seems to have simply been not enough. Anyone who has ever primed an old fashioned pump knows that sometimes that first flow of water dies quickly. Obviously, the program ran into some other serious hurdles. Our president spoke of “shovel ready projects”, but with environment laws, zoning concerns and other special interest advocates starting a project can take years. I am reminded of a highway extension in my community a few years back that spent many years mired in legal arguments because a particular bird nested in the proposed path. I thought birds had wings and would fly if a bulldozer was moving towards them?
Our president is encouraging the development of a “green energy” business sector. This is an excellent direction to pursue, but I suspect that it may be a decade or more before this initiative starts to really create any jobs on a large scale.
It is my casual and unofficial observation that 20-25% of our economy is driven by the construction trades, and this is where we need to be creating jobs in the immediate future. I know, we have a glut of idle houses and office space across the country. My focus for construction is on our aging and often crumbling public infrastructure across our continent. We have thousands of bridges, tens of thousands of miles of highway, water works and other similar constructs in a state of significant decay. I know, it sounds a lot like Roosevelt’s WPA of the 1930’s “New Deal”. Bottom line is that much of this infrastructure is crumbling. When the trades are working, they are buying cars, refrigerators and shoes. The projects they are working on are buying raw materials from steel, to lumber, to concrete and heavy equipment. May of these projects would take years to complete, but this is how you work that pump lever until the flow is strong and steady. I know, this is going to cost a lot of money, but this is the good kind of debt. As the big long term projects are being built, those working feel confident in their sustained income and start spending on all the other things that are part of life and a healthy economy.
I know, none of this qualifies for that mystical “shovel ready” term, but once the designs are blessed and the environmentalists are sated, we all benefit. None of these kinds of projects are cheap, but the decay is already there and these projects will only get more expensive in coming years regardless.
With business banking investment at a virtual halt, we are now facing a situation that is not to different from the circumstances of the U.S. in the mid 1930’s. In 1937 Franklin Roosevelt faced with pressure to cut the deficit reduced government spending. The result of the spending reduction was a new wave of job losses. Our President professes to be a student of history and here is a clear case where we can learn from our history. As we have seen, even mere talk of curbing the deficit is detrimental to our limping economy. What is needed is virtually the exact opposite, but everyone seems scared to say it.
The obvious question is; won’t greater deficits lead to greater debt and a greater burden that we pass on to the next generation? The answer is yes in the short term, but this has to be about solving our long term issues. The current deficits are clearly more a result of reduced or lost revenue than of increased spending. In the long view, deficits will only fade with an increase in revenues from wages and profits. I have also heard it postulated that many of the countries holding U.S. debt would back out if we allowed our debt to grow. At first review, these arguments seem logical, but remember that countries like China invest heavily in the U.S. because it is a sound and “guaranteed” investment. They need us to be healthy enough to continue to pay the interest on our debt and to continue to buy the goods they produce. In truth, the ones carrying our treasury paper such as the Chinese have the most to lose.
I know the terms sound contradictory, but if we can’t save our way out of this recession, we are going to have to spend our way out.
Unfortunately, spending at this scale will definitely mean accumulating more debt. Unfortunately, in our sound bite driven world, the notion of more spending is something that many politicians will speak of, but seldom when the microphones are turned on.
I don’t consider myself a “Keynesian”, but he did have a good point. Ultimately we need to be spending rather than saving or hoarding. Adam Smith emphasized that when individuals flourish, so will their nation. Too much saving creates under-consumption and money stops moving at all levels of the economy. If there has ever been a time when our government should be looking to spend more, this is it.
What’s the real worst case if we did spend beyond our ability to pay? I suspect the interest rates would be ratcheted up, but life would not stop. It is time to open the check book and give our economy a swift kick in the you know where.