Over at the Economic Policy Institute's website, Josh Bivens has an interesting article up about fiscal policy in a depression. Actually, it's a bit more than that, as he mentions here:
Conventional wisdom says simply that we need fiscal stimulus now, and long-term debt reduction later.
It sounds reasonable enough, and I may have even believed it myself a couple of years ago. But it turns out to be wrong.
The two imperatives of immediate stimulus and long-run debt reduction are deeply asymmetric. Every day we don’t act to bring down the unemployment rate quickly is another day of human misery and pure economic waste. Since the Great Recession began, the nation has foregone more than $3 trillion in potential income because of idled resources (people and factories). In 2011 this “output gap” exceeded $800 billion again, and the first quarter of 2012 saw us move nowhere toward closing it.
It’s OK to add to debt to grow jobs
Let me just break in here to say that there are lots of reasons that a national economy is not like a household budget. Yet there are plenty of folks who opine about the former as if it's the latter. Even so, there are certain things that these folks overlook. Not the least of those things is that household budgets often include indebtedness. People use credit to buy cars, computers, and houses. Most of us use credit cards, even if we pay them off at the end of each month. If you need something, and know you can pay it back later, going into debt for a little while is OK, if not expected.
I write this, by the way, as someone who hated the experience of going into debt to buy a house. I was able to pay it off early, and was glad to do so. There's nothing like the idea of owing someone money for the next thirty years to make you think about what you want to be when you grow up. Anyway, back to Josh Bivens:
But the surest way to lower unemployment quickly is to add to public debt to finance job-creating measures like aid to distressed households and states and infrastructure investment. And so long as the economy is operating below potential, the additional debt does no harm to the economy.
This is textbook macroeconomics. The danger that budget deficits theoretically pose to economies is that in order to borrow, government must find lenders, which means competing for the scarce savings of households and businesses with private firms looking to borrow money to invest in plants and equipment. This competition can bid up the price of borrowing (interest rates) and private firms will hence forgo some of these productive investments.
So why doesn’t this story apply to the United States today? Because there is no discernible upward pressure on interest rates. And that’s not a fluke—remember that it was the scarcity of savings relative to desired investment that drove interest rates up in this scenario. But, savings today aren’t scarce—households continue to save and pay off debt (that “de-leveraging” that you may have heard about) and businesses have accumulated record amounts of unspent liquid assets. This glut of savings relative to desired investment has put relentless downward pressure on interest rates.
It’s OK to add to debt to grow jobs
The worst thing a government can do is leave people and industries unemployed. Both tend to get stale after awhile, of course, but the big reason is that when they're unemployed these people can't buy anything. Nor can they pay state and local taxes. They will collect unemployment, and use food stamps. Even assuming all the employment is funded by the government, there's a positive side, but since those people will spend money that is then creates demand that employs other people, it's a win.
What's more, and Dr. Biven's quote alludes to this in that sentence about "de-leveraging", when there's more chance of employment, people are less worried about needing to save for a rainy day, and they'll spend more.
Spending on anything that improves our economy right now is a strategy that's full of win. Let's just briefly list the advantages:
- Money is cheap. Dirt cheap, in fact. Interest rates have almost never been lower, at least for large institutions.
- Labor is cheap and available. Real unemployment is still over ten percent, according to EPI, and I have little doubt it's no lower than that.
- We're at less than full capacity. That means traffic's lighter, which makes rebuilding roads and transportation facilities easier. There is also lots of commercial real estate available, at least in many parts of the country.
Plus, of course, it gets the economy moving again. You'd think politicians would be jumping all over it. That they're not shows just how bereft we are of leaders here.
Far from being a drain on the economy, borrowing money at such low interest rates for things that we need to do is a great way to accomplish both fuller employment and improving our society. Improving transportation, using energy more cleanly and efficiently, protecting ourselves from natural disasters by reinforcing or rebuilding old structures and creating better emergency facilities, and improving the sad state of our public education systems are all things that require money and effort. The supply of both is never going to be cheaper, and the time to do it is never going to be better than right now.
Afterword/UPDATE: On the chance that some readers haven't seen it yet, I'll pass along this video from early June in which Paul Krugman discusses the effect of borrowing in a depression with a U.K. Member Of Parliement (MP) and a British venture capitalist. What I like about this exchange is that Krugman pretty clearly lays out why there's no real worry about borrowing right now, and that it is, in fact, worse not to implement deficit spending to get things moving again: