Alan
S. Blinder, a Princeton economics professor and former vice chairman of the
Federal Reserve, contributed a
guest editorial to the July 8 Wall Street Journal entitled "The
Economy Needs More Spending Now."
Since Blinder is a moderate, his views are a refreshing contrast to the ultra-right-wing rants that
generally fill the editorial pages of that august journal.
Blinder
says that besides politics, the chief cause of our economic policy failures is
the failure to distinguish between short-term problems and long-term
problems. Different ailments
require different prescriptions.
The medicine for short-term problems, used in isolation, could make our
long-term problems worse.
But trying to apply long-term remedies in the short-run will only
cripple the economy such that no long term goals are accomplished anyway.
The
problem with the American economy right now is a short-term problem---lack of
spending. The only remedy is to
increase spending. This
could be done by either increasing government spending at all levels, lowering
taxes on working people so that they have more to spend, or giving investment tax credits to
manufacturers so that they buy more equipment, etc. This is what "The Stimulus" did, and it worked. The GDP would be at least 2 percentage
points lower had this not been done.
And if "The Stimulus" had been twice as large, we would have
gained an additional 2 points, and
by now we would have full employment.
Everyone in Congress knew this.
So
why didn't we pass a large enough stimulus to do the job? Because everyone in Congress was also
worried about our long-term problem,
which is our accumulating national debt. The Clinton administration had left a balanced budget, but
Bush began his administration with a huge tax cut, and then went on to fight
two wars without increasing taxes to pay for them. So when the market crash came in 2008, many in government
felt that they had very little room to maneuver, since they felt that we were already drowning in debt. Yet if they had passed a large enough
stimulus, everyone would now have a full time job, social expenditures would be lower, and the increased tax
collections from wages would easily balance the budget. But instead of fixing
our short-term problem, we tried
to use austerity to fix the long-term problem first. This is like letting the accident victim bleed to death
while carefully building the perfect cast to put on the broken bones. Blinder explains the difference between
short-term and long- term solutions as the difference between demand-side and
supply-side solutions. He writes:
"Long-run
growth is supply-determined: it
depends on the economy's ability to produce more goods and services from one
year to the next. To accomplish that you need four basic ingredients: more labor, more capital, better
technology, and--if you can manage it--a better-functioning economy that
utilizes these inputs more efficiently.
These four ingredients constitute the essential core of supply-side
economics, and deficit reduction helps boost growth via the second: more capital.
In
the short-run, however, output is demand-determined. The big question is how much of the economy's productive capacity is used. And that depends on the
strength of demand----the
willingness of businesses, consumers, foreign customers and governments to buy
what American businesses are able to produce. When demand falls short of supply, deficit reduction hampers economic growth by reducing demand
even further. " (Emphasis mine)
Blinder
explains that a society can increase capacity by building more plant and
equipment and training more workers, but if there is insufficient demand, all
that new capacity would just sit idle. This is about what has happened since
the beginning of the Great Recession. Blinder says that we must treat both the
long-term and the short-term problems. To do this, we should not try to
aggressively cut spending now, while the economy is weak and needs all the
spending it can get. Instead, we
should spend aggressively today to end the recession, while passing laws today
that will cut the deficit, but take effect only several years down the road,
when the economy is fully recovered. While Blinder asserts that deficit reduction today simply makes
the recession worse by dampening demand, he does not go into much detail as to
how it does this. Some
months ago, I posted on this blog an essay entitled, "Why Supply Side Economics Doesn't Work, " in which this is explained. Check it out.
While
Blinder's remarks were addressed to the problems of the American economy, they
would be even more applicable to the problems of the Europeans, who have used
austerity even more foolishly than we Americans have.
