Spend, Spend, Spend!

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.

8 comments… add one

  • TastyBits

    I suspect the problem is that he and others have a cartoonish (childish) understanding of how and why businesses expand or are created. Many new and expanded business are supplying a product or service that has no demand, but the owners anticipate creating the demand required to sell that product or service.

    Many of Apple’s product have no demand, but they quickly create an overwhelming demand. Also, a business may expand to “poach” existing demand. Wendy’s will build close to an existing McDonald’s.

  • Icepick

    That’s why the fire sale, one time only ARRA was so unforgiveably stupid.

    I think that ARRA was a great success as it achieved most of its goals. The goals were to spend a bunch of money on pet projects of the Democrats, thus rewarding supporters, and claiming credit for the great recovery that was bound to happen whether an ARRA-like bill was passed or not. Given that over half of the electorate believes that we’re living in the best economy ever, it was a total success.

    The only failures are that they didn’t spend enough money to make the Krugmans and Friedmans of the world happy. Really, the thing should have been at least four trillion dollars, most of it slated to pre-K school programs and building bridges over rivers that already have bridges over them. And better accommodations at public airports for the very rich and powerful to enjoy while keeping the riff-raff out. Heck, and extra hundred billion or so would have insured that everyone not flying first class was required to have a full body cavity search before being allowed to check their bags*. Throw in an extra fifty billion to reward the guys at Google and you can have them all posted on YouTube. That would have made the country at least as cool as (notionally) Communist China.

    * Matter of fact, make all of the unwashed submit to colonoscopies before being allowed to board a plane. It’d be certain to be popular with the proctologists and the lab companies and the manufacturers of examination equipment, as well as the laxative makers and adult diaper manufacturers. You know, it’s all about protecting people in the skies, and in the bathrooms.

  • We can love the private sector to death, but businesses do not invest because politicians love them. They invest when they see demand.

    Yes and no. Yes businesses will invest if they see demand, no they wont (necessarily) invest if the risk is too high. Upping demand can offset the risk, but artificially upping demand may not because it comes with an implicit inclusion of risk…what if the artificial increase in demand goes away?

    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.

    Too some people empirical facts just don’t matter. The rate of growth in real PCE has been about the same prior to the Great Recession. Granted, given the L-shaped nature of the recession on real PCE it is below where it otherwise would be, but consumption expenditures have been growing.

    These kinds of glaring oversights just make me go, “Retard.”

    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.

    Only in a technocrats mind. The idea that these smart, and super unbelievably informed technocrats will make ultra-wise spending decisions that will boost demand and productivity and that when we stop demand wont fall, nor will there be any adverse impact to productivity growth is sign of arrogant person. And this ignores the problems of Rent Seeking and log rolling that Dave rightly notes. That is, even if we assume that these guys are awesomely smart and informed like nobody ever has been, and that they are so awesome that they wont abuse the power they have been given…they’ll do everything just right, or nearly so.

    So an arrogant retarded.

  • jan

    I wish all three guys, who commented above, were in government. Maybe then there would be some real and productive decision-making going on in this otherwise idealogically stupid administration.

  • jan,

    I could never ever be in government. Not because I don’t want to (well okay, I don’t want too, but that point aside). The problem is that people would ask me, “Steve, as grand pooh-bah, how would you get the economy going again?”

    My response would be, “Shit, I don’t know. I don’t think anybody really knows. I’ve got some ideas that will make marginal improvements, but most of those will likely be very unpopular such as major revamping of the tax code or sending a strong signal to large businesses that they can’t count on a bailout.”

    That would scare people compared to a guy who says, “I’ve got a 15 point plan that will bring back jobs from over seas, and put a new car in everyone’s garage!!!”

    Everyone one will love the other guy while I’ll be seen as some kind of dope who doesn’t know his ass from a hole in the ground…and actually when it comes to getting the economy going, that isn’t a bad description…I’m just honest about it.

  • jan

    I’m just honest about it.

    Steve V.

    That’s the whole point, honesty. And, that is what is sorely lacking in government today…and, probably always has been.

    Again, referring back to Ben Carson’s speech — I think that’s why it was so wildly received by so many, in that he simply spoke his mind — dissing PCism, the tax structure, complicated, confusing HC reform that is now swarming around the country, and unionized education that is dumbing down students and under-emphasizing merit in teaching standards.

    He obviously offended people. But, he also encouraged others, in that honest words were spoken in a public forum, rather than safely whispered in hushed one-to-0ne conversations. The sheer fact of the matter is that being liberal is the sanctioned ideology of the moment. All other notions, encouraging personal self-reliance, government acoountability, or even respecting certain religious doctrines or values, is jeered and shouted down.

  • That’s the whole point, honesty.

    Honesty doesn’t win elections. Lies and more lies will get one elected. Going out there and telling people the truth will simply scare them.

  • TastyBits

    @jan

    The reason politicians are not “honest” is divisive/wedge issues. An “honest” position on any one of these issues will ensure the loss of a number of voters. A majority of the voters would need to agree with a politician on all these issues. This is highly unlikely, and therefore, the politician must not have an “honest” position to win an election.

    It is made worse when the politician’s party would rather lose with a pure politician.

    When Mitt Romney donned the Republican team jersey, he lost voters, and for each declaration of purity he had to make, he lost more voters. On immigration, he should have said, “We are not going to deport 11 million people. We are going to secure the border, and we are going to work out how to legalize these folks.”

    To many Republicans, it was more important that he instantly ensure a large number of voters not vote for him. This is going to occur anyway, but there are still Republicans who want to become the new Whigs.

    In 2004, John Kerry’s bows to the Democratic purists hurt him, and I am probably the only person who remembers the Clinton years and the apoplectic Democrats. It is now forgotten that President Clinton broke with the Democratic orthodoxy, and he is now a Democrat’s Democrat.

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