What's the best way to jump-start the economy?
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IN THIS collapsing economy, we have a lot more to fear than just fear itself.
Still, anxiety is clearly making things worse. As people cut back on spending to prepare for hard times, that diminished demand deals another blow to economic activity. Thus behavior that makes sense for the individual is counterproductive for the nation. It's what economist John Maynard Keynes called the paradox of thrift.
This question then comes: What's the best way to combat a recessionary psychology and jump-start the economy?
Here's the reality: There are only a few possible replacements for the drop-off in consumer spending.
One is business investment - but that won't pick up until the overall economy does.
A second is an increase in exports. The recent fall in the dollar, which makes US goods cheaper to foreigners and theirs more expensive to us, should help some. Still, with economies around the world slowing down, exports are unlikely to rise enough in the short term to be of particular help.
That leaves the federal government to step in with increased spending.
"There is nothing that looks promising except for the government," says James Galbraith, an economist at the Lyndon B. Johnson School of Public Affairs at the University of Texas. "It has to take up the slack."
More spending obviously means more borrowing and bigger deficits. "But if you are ever going to run big budget deficits, now is the time to do it," says Gus Faucher, director of macroeconomics at
Deficit hawks realize that. They would, however, like a commitment to confronting the deficit and debt once the economy is better. Further, policymakers should address our short-term economic woes in a way that does the least damage to our already shaky long-term fiscal position, says Bob Bixby, executive director of the Concord Coalition. That means avoiding permanent tax cuts or permanent spending increases on entitlements.
Tax cuts aren't the way to go economically, either. Although tax rebates have been the anti-recessionary weapon of choice in recent times, the paradox of thrift reduces their bang for the buck as economic stimulus; in troubled times, people tend to save, rather than spend, the tax dollars they get back.
Cathy Minehan, former president of the Boston Fed, says most economists think that only about 20 to 30 percent of the last tax rebate actually got spent.
"The rest was saved or used to pay down debt," she said. "I have nothing against saving, nothing against paying down debt for the long run, but if it's short-term stimulus that you want, you want that money to be spent."
That's why policymakers are now talking about infrastructure work and other public projects as a way to get money moving in the economy.
"There is now a general sense that tax rebates are less efficient dollar for dollar than building highways or schools or repairing transit systems," says US Representative Barney Frank.
That consensus includes conservative economist Martin Feldstein, once President Ronald Reagan's chief economic adviser; in a recent
Thus President-elect Barack Obama is smart to have settled on use-it-or-lose-it money for infrastructure projects that states can get started quickly. Efforts to modernize and upgrade school buildings and to make public buildings energy efficient should also provide an economic boost over several years. Another good move, says Faucher, would be an infusion of funds to keep state governments from slashing spending further. That would help maintain economic demand, while also preserving important programs and services.
In an odd twist, with the growing agreement that the federal government needs to spend heavily to counteract recessionary forces, money may be available for any number of worthwhile projects that would ordinarily be given short shrift, says Dean Baker, co-director of the Center for Economic and Policy Research.
That's one silver lining amid the gathering gloom.
Scot Lehigh can be reached at lehigh@globe.com.
