Economics quiz: What is the best response the government should have to a recession? Is it:
- A) To hand out a bunch of tax cuts?
- B) To spend money on public works projects?
- C) To do nothing?
Most economists would probably answer B. To see why B is a better answer than A, consider this scenario: Suppose there are two governments. One decides to give $1000 to the wealthy, the other spends $1000 on public works projects. Ultimately, all the money the second government spends on public works projects is going to make their way into the hands of people, whether construction workers, contractors, extractors of natural resources, you name it. So both governments are giving $1000 to various people, but the first government is handing it out for free while the second government is actually getting something for their money – and that something might benefit people who won’t directly receive any of the money, for example, the construction of roads.
A sizable chunk of the 2009 stimulus, on the other hand, went to tax cuts and maintaining the status quo for various government programs; arguably less than half went towards actual things the government could get for its money, and several economists voiced concerns that the whole thing wasn’t big enough to make enough of a dent in the recession. What’s more, the Congressional Budget Office raised concerns that the stimulus could actually be bad for the economy in the long term by adding to the nation’s debt and potentially crowding out private investment.
In any case, faced with this apparent recommendation against free markets and for bigger government from a field they normally depend on to recommend the opposite, the Tea Party would probably recommend C, do nothing – in fact, maybe even go in the opposite direction by loosening restrictions they see as holding the economy back. (Mainstream Republicans, on the other hand, seem to want to answer A.) Despite the prevalence of Keynesianism, there are certainly enough economists willing to argue that any government interference in the marketplace is bad no matter how bad the economy gets. It’s worth noting that no projections seem to indicate that the stimulus would actually shorten the recession, in terms of a return to baseline GDP, only make it less severe. There is evidence that the stimulus has created jobs that wouldn’t otherwise exist, and any failure to meet the unemployment targets projected at the time is more because the recession itself was even worse than thought at the time, but it’s not clear that that alone should be the goal. On the other hand, most Keynesians would argue that the government should depress the economy when it starts riding too high, to prevent it from crashing and causing a far worse recession.
What this gets at is the question of what the government’s policy towards the economy should be: whether it should take an active role in creating optimum conditions for the economy to function, or whether that sort of thing just causes recessions in the first place? Even the people who are supposed to be experts can’t quite agree, so I sure as hell won’t even try to resolve the debate, and should someone like Ron Paul become president they would probably attempt to get the government to take a more hands-off approach. In turn, that debate is even further bound up in the debate about the government’s role in everything else, as opposed to the free market, and the appropriate level of taxation, raising a whole other set of issues.
That said, Keynesianism is mainstream enough that my introductory macroeconomics text seemingly presented it uncritically, and its most well-known critics, the Austrian School espoused by Ron Paul, are mostly rejected by most mainstream economists, since we haven’t had anything resembling even the depressions of the 19th century since the government took a more active role in the economy starting in the 30s (though the present recession has come close). Besides, the truth is that the government isn’t likely to take its hands off the economy, or anything else, anytime soon. Thus, I would tentatively support the stimulus, a larger stimulus, and a more spending-focused stimulus. As much as I don’t want to give more power to government, ultimately a lack of jobs are what’s at the heart of the Occupy movement, and if the stimulus can provide them, and it’s not clear anything else would, more power to it. Besides, many of the things the stimulus pays for are things the government, for good or ill, essentially has a monopoly on, things the free market ultimately relies on even if it might do better at it were it forced to take over.
What this touches on, though, is the central disagreement in American politics between the right and the left. The right believes the government should be as small as possible and not go meddling in people’s lives; the left believes the government has a duty to create good lives for everyone. If the government were wholly committed to one or the other it would probably produce the optimum effects each approach suggests, better than the compromise-enforced status quo, but since there remains disagreement over which approach is really best we end up with a mix of both worlds. Is there a way to get the best of both worlds, allow people to live their lives as they choose without the negative consequences that implies? I’ll attempt to answer that question as this series continues, starting with quite possibly the biggest and most telling example.