UPDATE: Justin rings in with a story on Time.com.
The spate of retailers reporting devastating December sales this morning provided a nice backdrop for President-elect Obama’s speech in Virginia about why we need to spend another $775 billion to fix the economy. About 40% of that sum comes in the form of tax cuts, but the bulk of the fiscal stimulus would go to pay for new programs and projects—everything from the greening of federal buildings to the computerization of medical records.
The idea, just to be really basic about it, is that American consumers and companies aren’t spending enough, so the government has to. There was a great article in the New York Times yesterday about how pretty much all most economists now agree that it’s go-time on this count. Even Marty Feldstein, the champion of conservative economic thought who was a top adviser to President Reagan, has noted that lower interest rates aren’t getting the job done because credit markets are screwy and that tax cuts only get you so far, so the “heavy lifting” will have to be done by increased government spending. (Quick historical recap: this hasn’t been the consensus in the field of economics since the 1960s.)
But most economists also agree that fiscal stimulus shouldn’t be an open-ended thing. This morning I was chatting with Andrew Dilnot, an economist at Oxford University who used to run the U.K’s Institute for Fiscal Studies—what he described as a cross between the Congressional Budget Office, the National Bureau of Economic Research and the Brookings Institution. He argued that fiscal stimulus should be geared toward priming the pump—that is, getting private players to start spending again. “The strongest argument for doing these sorts of things is that it’s a way of the government demonstrating that they’re not going to allow the economy to slide into a depression, that they’ll spend the money necessary,” he said. “If people believe it’s going to be okay, then people who are putting off buying a new car or house will instead say, I shan’t lose my job, I’ll go ahead and do that.”
So if stimulus is partly a game of psychology, then it would make sense to ease off the extra spending once the economy picks back up. Get consumers and businesses confident enough to spend again, and then let them take over. In an interview on Wednesday, Obama nodded at that logic. “I’m not out to increase the size of the government long-term,” he said. “My preference would be that the private sector was doing this all on their own.”
I’m guessing that sounds pretty nice to most folks, especially considering the amount of money we’ve already spent on fixing the economy. But is it true? Jay Newton-Small has a piece up on Time.com that considers how Obama’s stimulus package gives him a running start on a bunch of items on his long-term agenda. If we head down this road and GDP rebounds, do we suddenly cut funding? I know a lot more about economics than I do politics, but I’m guessing most legislation doesn’t come with an easy on-off switch.
Though that’s not to say I’m against spending money to increase the energy efficiency of two million homes or to build broadband access to all corners of America so that small businesses, no matter where they’re located, can be globally competitive. These are good ideas as far as I’m concerned.
All I’m saying is when we start buying computers for schools and paying people to put up windmills let’s be clear about whether we’re doing these things to save the economy—or if we’d be trying to do them in the long-term anyway.
Here’s one of my favorite parts of Obama’s speech:
Instead of politicians doling out money behind a veil of secrecy, decisions about where we invest will be made transparently, and informed by independent experts wherever possible. Every American will be able to hold Washington accountable for these decisions by going online to see how and where their tax dollars are being spent.
I can’t wait.