BERKELEY – From the day after the collapse of Lehman Brothers last year, the policies followed by the United States Treasury, the US Federal Reserve, and the administrations of Presidents George W. Bush and Barack Obama have been sound and helpful.
The alternative – standing back and letting the markets handle things – would have brought America and the world higher unemployment than now exists. Credit easing and support of the banking system helped significantly by preventing much worse.
The fact that investment bankers did not go bankrupt last December and are profiting immensely this year is a side issue. Every extra percentage point of unemployment lasting for two years costs $400 billion. A recession twice as deep as the one we have had would have cost the US roughly $2 trillion – and cost the world as a whole four times as much.
In comparison, the bonuses at Goldman Sachs are a rounding error. And any attempt to make investment bankers suffer more last fall and winter would have put the entire support operation at risk.
As Fed Vice Chairman Don Kohn said, ensuring that a few thousand investment bankers receive their just financial punishment is a non-starter when attempts to do so put the jobs of millions of Americans – and tens of millions outside the US – at risk.
The Obama administration’s fiscal stimulus has also significantly helped the economy. Though the jury is still out on the effect of the tax cuts in the stimulus, aid to states has been a job-saving success, and the flow of government spending on a whole variety of relatively useful projects is set to boost production and employment in the same way that consumer spending boosts production and employment.
And the cost of carrying the extra debt incurred is extraordinarily low: $12 billion a year of extra taxes would be enough to finance the fiscal-stimulus program at current interest rates. For that price, American taxpayers will get an extra $1 trillion of goods and services, and employment will be higher by about ten million job-years.
The valid complaints about fiscal policy over the past 14 months are not that it has run up the national debt and rewarded the princes of Wall Street, but rather that it has been too limited – that we ought to have done more. Yet these policies are political losers now: nobody is proposing more stimulus.
This is strange, because usually when something works the natural impulse is to do it again. Good policies that are boosting production and employment without causing inflation ought to be politically popular, right?
With respect to Obama’s stimulus package, it seems to me that there has been extraordinary intellectual and political dishonesty on the American right, which the press refuses to see.
For two and a half centuries, economists have believed that the flow of spending in an economy goes up whenever groups of people decide to spend more. Sometimes spending rises because there is more disposable cash in the economy, and sometimes because changes in opportunity costs – the cost of forgoing some other action, such as saving – make people want to spend the cash they have more rapidly.
Sometimes and to some degree these increases show up as increases in prices, and sometimes and to some degree as increases in production and employment.
But, whatever the cause or effect, spending always goes up whenever groups decide to spend more – and government decisions to spend more are as good as anybody else’s.
They are as good as the decisions of mortgage companies and new homebuyers to spend more on new houses during the housing bubble of the mid-2000’s, or of the princes of Silicon Valley to spend more building new companies during the dot-com bubble of the late 1990’s.
Obama’s Republican opponents, who claim that fiscal stimulus cannot work, rely on arguments that are incoherent at best, and usually simply wrong, if not mendacious. Remember that back in 1993, when the Clinton administration’s analyses led it to seek to spend less and reduce the deficit, the Republicans said that that would destroy the economy, too.
Such claims were as wrong then as they are now. But how many media reports make even a cursory effort to evaluate them?
A stronger argument, though not by much, is that the fiscal stimulus is boosting employment and production, but at too great a long-run cost because it has produced too large a boost in America’s national debt. If interest rates on US Treasury securities were high and rising rapidly as the debt grew, I would agree with this argument. But interest rates on US Treasury securities are very low and are not rising.
Every single Treasury auction, at which the market gobbles up huge new tranches of US Treasury debt at high prices, belies the argument that the economy has too much debt.
Those who claim that America has a debt problem, and that a debt problem cannot be cured with more debt, ignore (sometimes deliberately) that private debt and US Treasury debt have been very different animals – moving in different directions and behaving in different ways – since the start of the financial crisis.
What the market is saying is not that the economy has too much debt, but that it has too much private debt, which is why prices of corporate bonds are low and firms find financing expensive.
The market is also saying – clearly and repeatedly – that the economy has too little public US government debt, which is why everyone wants to hold it.
J. Bradford DeLong is Professor of Economics at the University of California at Berkeley and a Research Associate at the National Bureau of Economic Research.
Copyright: Project Syndicate, 2009.