Roubini To The Neo-Hooverites: An Economic Stimulus Package Can Make The Deficit Smaller
Roubini To The Neo-Hooverites: An Economic Stimulus Package Can Make The Deficit Smaller
The Wonk Room has been arguing recently that an economic stimulus package is a necessary step towards recovering from the current financial crisis. The counter argument – which Matthew Yglesias calls “Neo-Hooverism” – is that the government should exercise fiscal restraint and curb spending, out of concern for widening deficits.
However, during a hearing today before Congress’ Joint Economic Committee, New York University Economics Professor Nouriel Roubini explained that failure to enact a fiscal stimulus could actually result in wider deficits as the economy contracts. In his estimate, this would send the U.S. into a “very severe recession.” Watch it:
Roubini is part of a growing chorus of voices calling for a fiscal stimulus. Yesterday, Gov. David Paterson (D-NY) and Gov. Jon Corzine (D-NJ) joined in, saying that “state governments would face devastating cutbacks if they did not receive assistance soon”:
“We are cutting all we can,” Mr. Paterson told the House Ways and Means Committee. “Therefore, we feel that targeted, sensible actions by the federal government will provide relief for us now.”
CAP’s Michael Ettlinger agrees, noting that “of particular importance are steps to help state governments so that they don’t become a drag on the economy as their revenues dry up and demand on their services grows.”
Today, the economic stimulus package also received an endorsement from Professor Martin Feldstein, an economic adviser to Sen. John McCain (R-AZ). In the Washington Post, Feldstein wrote:
The only way to prevent a deepening recession will be a temporary program of increased government spending. Previous attempts to use government spending to stimulate an economic recovery, particularly spending on infrastructure, have not been successful because of long legislative lags that delayed the spending until a recovery was well underway. But while past recessions lasted an average of only about 12 months, this downturn is likely to last much longer, providing the scope for successful countercyclical spending.
As Matthew Yglesias noted, Feldstein “gingerly avoids pointing out that this is the reverse of what his preferred candidate is proposing.” Indeed, McCain has said that he will freeze government spending on everything besides what he deems to be “vital” programs.
Feldstein believes that government spending is the only way to avoid a deeper recession. Will McCain get the message and endorse a full stimulus package?
One Response to “Roubini To The Neo-Hooverites: An Economic Stimulus Package Can Make The Deficit Smaller”
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I’m as much a fan of Keynes as anyone, and I support the idea that in a recession the government should step in and spend when the private sector is not to keep money circulating, however, I believe there are a couple problems with unbridled spending.
First, the world economic climate is such that if our budget deficit grows too large, foreign markets that are also struggling might not want to keep lending us cash. Don’t get me wrong, some countries like to see the US financially in their grip, but there is such a thing as too much deficit. So the question becomes are we quickly nearing that level?
Shouldn’t the US, to alleviate some of those concerns, ask for the loans, but also shift federal spending around, cut wasteful and outdated programs, and therefore require less loans over all? Tightening the belt and curbing spending is a bad idea, agreed. But this might be the best time to streamline the efficiency of the government for ‘better’ times, as well. I guess what I am trying to say is; the economic situation could be helped by more productive investments, by taking less from others, and shifting from wasteful programs to useful (infrastructure) ones.
And second, it is difficult to cut spending programs back once they are enacted. Programs implemented to revamp our infrastructure would help the current situation, but once the economic crisis passes, will these programs be suspended? I would hope so. As part of this, tag the important projects to get fixed first, so less pressing programs can be shifted to a later date and still be addressed, just not during the time of ‘big spending.’
Keynes’ theory has government pick up the slack when the private sector slows, but conversely, it also has government tightening its belt once the private sector begins to grow. It might be better in light of the budget to actually follow through with that, and when providing funds for infrastructure projects, make them tied directly to the economic climate. Once the business atmosphere is better, finish the current projects, and stop new ones.
In summary; why not do both? Curb government spending where it is inefficient and wasteful, which would also lower our need to get further in debt, and increase government spending on infrastructure projects to take the place of lacking private sector movement. But drop the infrastructure plan when it is no longer needed?
Interesting..
October 30th, 2008 at 5:37 pm– Niffy