Balancing the Federal Budget During a Recession 4

Follow this link to see the McCain ad that prompts this comment.

McCain still doesn’t get it.  Normally you do not cut federal spending when the economy goes into a recession.  Cutting spending does not create jobs, it kills them. Cutting spending was part of the Hoover plan during the depression.  Even Roosevelt was unaware, at the beginning of his term, of the problem that budget cutting causes.  It took the economist John Maynard Keynes to explain it.

The problem with the current economy is that business and consumers are too afraid to spend money, and rightfully so.  This behavior creates a downward spiral for the economy.  If you give people money in tax breaks, it goes right to savings if they can afford to save.  They want to set aside money for a rainy day. The banks don’t want to lend the money that people are depositing due to the same fear. Money not circulating causes the economy to contract.

When things get really bad, the only way to get money circulating is for the government to spend it to buy things. If the government buys things that are investments in economic growth, then so much the better.

This is how we got so much infrastructure built during the depression of the 1930s.  We are still benefiting from the dams and other items that were built back then.

Such investments could be roads, public transportation, airports, water treatment facilities, schools, funding of science and engineering research and development.  Blowing up the money in Iraq is not such an investment.

By the way, if the rich get too fearful to spend their money, then the government may have to tax some of  it and spend it.  Otherwise, its trickle down is not even a trickle.

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4 thoughts on “Balancing the Federal Budget During a Recession

  • SteveG

    The argument against infrastructure is weak for another reason. It is not so much the bridge being repaired or the rail line being opened that is needed. The first shot in the arm for the economy is putting people to work on these projects.

    After the slump is over and the bridge is repaired or the rail line is opened, you get the added benefit of having a useful product for all that money.

  • RichardH

    Nobel Economist Paul Krugman (Let’s Get Fiscal, NYT 10-17-2008) advocates for Plan G (i.e., spend and borrow).

    ‘[T]here’s not much Ben Bernanke can do for the economy. He can and should cut interest rates even more — but nobody expects this to do more than provide a slight economic boost.

    ‘On the other hand, there’s a lot the federal government can do for the economy. It can provide extended benefits to the unemployed, which will both help distressed families cope and put money in the hands of people likely to spend it. It can provide emergency aid to state and local governments, so that they aren’t forced into steep spending cuts that both degrade public services and destroy jobs. It can buy up mortgages (but not at face value, as John McCain has proposed) and restructure the terms to help families stay in their homes.

    ‘And this is also a good time to engage in some serious infrastructure spending, which the country badly needs in any case. The usual argument against public works as economic stimulus is that they take too long: by the time you get around to repairing that bridge and upgrading that rail line, the slump is over and the stimulus isn’t needed. Well, that argument has no force now, since the chances that this slump will be over anytime soon are virtually nil. So let’s get those projects rolling.

    ‘Will the next administration do what’s needed to deal with the economic slump? Not if Mr. McCain pulls off an upset. What we need right now is more government spending — but when Mr. McCain was asked in one of the debates how he would deal with the economic crisis, he answered: “Well, the first thing we have to do is get spending under control.” ‘

  • SteveG

    Thank you RichardH for the link to the DeLong article. I found it to be very informative. I am amazed at what I got right considering that what I wrote was all from memory of what I learned about economics 40 years ago. I may also have learned a thing or two since then.

  • RichardH

    Berkeley economics professor Brad DeLong and RichardH approve your suggestion.
    In the Oct. 16, 2008 issue of The Guardian, DeLong wrote “From Plan A to Plan G.” Plan G is long overdue. Here is DeLong’s article.