Conventional wisdom holds that America has to get the federal budget deficit under control. Conservatives and even some good-government moderates have called for a virtually government-wide spending freeze. But cutting federal spending during a recession is a recipe for depression. To climb out of the hole that conservative economic ideology and policy has thrown us into, we need federal spending to reinvigorate economic growth. We should use this moment to make investments that will improve our future. Here’s why.
We are looking at a deep and potentially long recession. America has lost nearly a million private-sector jobs since the beginning of the year. [CNN] Home values are declining at record rates. [Market Watch] Exports, which have been rising recently , will begin to sink as the economic downturn spreads across the globe. State and local government employment, which has also been rising, will certainly decline as layoffs are made to compensate for rising state-budget deficits. [Center on Budget and Policy Priorities] The manufacturing sector never recovered from the last recession. [New York Times] Consumer confidence recently plunged at the fastest rate ever. [Market Watch]
To avoid a deeper downturn, we have to kick start our economy. The consensus among economists, even “deficit hawks” like former Clinton Treasury Secretary Lawrence Summers, is that we need another fiscal stimulus to jumpstart economic growth. [Financial Times, New York Times] To be effective, a growth package will have to have a value of about 2-3 percent of our gross domestic product, or at least $300 billion. [Dean Baker] Congressional Democrats announced plans to enact part of that—a $150 billion stimulus—before the end of 2008. [Time]
The most effective stimulus would focus on making the investments we need to generate jobs. The stimulus payments distributed during the summer of 2008 didn’t help get the economy growing. Americans spent some of that money to pay down debt and some on goods made abroad, yielding little bang for the buck. To be more efficient, a stimulus plan should focus on making or sustaining public investments.
- First, it should provide aid to state and local governments to forestall deep layoffs.
- Second, it should extend unemployment payments and raise food stamp benefits, providing help to those who will spend the extra money.
- Finally and most importantly, it should include investments that are vital to improving our future: modernizing infrastructure, promoting green buildings, and developing clean-energy technology. These investments would create jobs here in America.
Economists say that such a stimulus package will yield the greatest return on the investment. [Dean Baker] In contrast, stimulus plans proffered centered on tax cuts for the wealthy tend to pull money out of circulation, generating the opposite of a stimulus effect. [Center for Budget and Policy Priorities]
The conservative economic strategy risks another depression. When faced with a sharp economic downturn after the Crash of 1929, President Herbert Hoover said, “We must have insistent and determined reduction in government expenses.” [1931 State of the Union] History emphatically shows that a short-sighted and narrow focus on deficit reduction leads to economic disaster.