Reconsidering the Case for Deficit Spending

A couple of articles caught my eye this week that make the case for increased government spending. Such a proposal may seem out of synch with our melting personal investment accounts and the expensive government bailout of Wall Street. If you’re U.S. John McCain, you’re even ready to put the kibosh on any government spending, except for defense, veterans and entitlement programs. So what's with the argument for deficit spending right now?

The New Republic’s Jonathan Cohn makes the case from the perspective U.S. Sen. Barack Obama – note the title of his article – “President Obama, ignore this bailout.” Cohn provides several examples as to how government spending right now can help either reduce longer-term, economy-wide costs or help the economy grow faster. For example, Obama administration-led health care reform can help reduce treatment costs and allow the government to exert more pricing power, thus decreasing the costs of Medicare and Medicaid. Cohn also advocates for greater investment in education and infrastructure – two areas that affect our rate of economic growth and resulting tax revenues. On energy, Cohn says that government subsidies that help businesses, offices, stores, and factories be more environmentally friendly can help to lower economy-wide energy costs, create new jobs, and wean the United States off foreign oil. Cohn is optimistic that Obama won’t bail on some of his spending proposals: 

Obama himself also seems to get it, notwithstanding his statement about delaying some projects. Speaking in Wisconsin on October 1, he said, "There are certain investments in our future that we cannot delay precisely because our economy is in turmoil." (The emphasis was his.) To prove it, he went on to promise spending on health care, education, infrastructure, and energy independence.

In the New York Times, Robert B. Reich, Secretary of Labor under President Bill Clinton, also opines on this issue. In “Saved by the Deficit?,” Reich suggests  that under our current economic conditions – deepening recession; relatively high unemployment rate; reduced consumer spending – “deficit spending is not unwelcome.” He argues that “not all deficits are equal”: 

As every family knows, going into debt in order to send a child to college is fundamentally different from going into debt to take an ocean cruise. Deficits that finance investments in the nation’s future are not the same as deficits that maintain the current standard of living.

Like Cohn, Reich calls for greater public investment in education, infrastructure, energy reform, and health care reform.  Both also point out that the bailout itself shouldn’t thwart future government spending. From Cohn:

…. The perception that Obama must radically pare back his ambitious spending proposals--a perception widely shared in Washington--makes several fundamental errors. For one thing, it misunderstands the nature of a Wall Street "bailout"--which, properly constructed, shouldn't seriously deplete federal funds. More important, the conventional analysis ignores the fact that we face deep economic problems besides the financial crisis--problems that only government can fix. The case for Obama's spending agenda hasn't suddenly become weaker. If anything, it's actually grown a bit stronger.

And from Reich:

Yet all is not what it seems. First, the $700 billion bailout is less like an additional government expense than a temporary loan or investment. The Treasury will take on Wall Street’s bad debts — mostly mortgage-backed securities for which there’s no market right now — and will raise the $700 billion by issuing additional government debt, much of it to global lenders and foreign governments. As America’s housing stock regains value, as we all hope it will, bad debts become better debts, and the Treasury will be able to resell the securities for at least as much as it paid, if not for a profit. And if there is a shortfall, the bailout bill allows the president to impose a fee on Wall Street to fill it.

….It should not be surprising … that the Wall Street bailout has generated so much anger among middle-class Americans. Let’s not compound the problem by needlessly letting it prevent the government from spending what it must to lift the prospects of Main Street.

In the coming weeks, keep your eyes out for a second fiscal stimulus proposal from the House. Although neither Cohn or Reich sees stimulus packages as the most effective tools for improving our economy’s fundamentals over the long-term, we appreciate Congress taking measures to help Americans in the short-term.