He who mounts a hobbyhorse dare not dismount. Dean Baker says “Only spending can save us now”:
There is nothing in the private sector that will replace the $1 trillion in annual construction and consumption demand that we lost when the housing bubble collapsed and the rest of the economy pretty much followed.
We can love the private sector to death, but businesses do not invest because politicians love them. They invest when they see demand. They don’t see it now and are not likely to see it any time soon. Consumers also will not go back to spending the way they did at the peak of the bubble for the simple reason that $8 trillion in housing-bubble wealth has vanished.
In this context, the government has the responsibility to fill the gap in demand. It can best do this through investments that will both create demand in the short-term and increase our productive capacity in the longer term.
The problem with this view is that it assumes that, despite all evidence, politicians will spend money wisely, productively, and efficiently rather than using it bolster their own positions, paying off friends, funding pet projects. It also ignores the reality that the only way for the government to spend enough fast enough is via the tax system which means doing the reverse of what was done last month, increasing the taxes of the highest income earners and reimposing the payroll tax.
Two words for Dr. Baker: explain Japan.
Here’s a wacky suggestion. Rather than thinking of the government as the consumer of last resort think of the government as the employer of last resort (as Keynes did).
I gather that Dr. Baker doesn’t believe the finding that debt to GDP ratios over 90% result in slow or no growth. Or, possibly, like the Chartalists, he believes that the government can issue credit virtually without limit without having an adverse effect on the private economy.
There are other solutions but there are no quick solutions. That’s why the fire sale, one time only ARRA was so unforgiveably stupid. The money was squandered, it didn’t create the headroom necessary to make the structural changes we need, there’s no appetite for structural change, and it kicked our debt payments into high gear.