We need another stimulus. There. I said it. 90% of economists agree. And 90% of our leaders probably know it as well, but are too chicken to say it.
Now I hear some of you recoiling in horror. ”More government spending? Are you f***ing kidding me? We need less debt, not more! Debt will just make things worse!”
Long term, yes. But short term? More debt is exactly what we need. If this sounds confusing, well, it’s because the US economy is big and confusing as well. So let’s simplify it, and take a little trip to a smaller scale model. Let’s call it “Keynes Island.”
On Keynes Island, let’s assume there are exactly three businesses — a butcher, a baker, and a candlestick maker. That’s it. For purposes of clarity, let’s call the three owners “Butch, Baker, and Candy.”
Let’s say one morning Butch wakes up, reads an article about the importance of austerity, and decides to cut his spending. Instead of getting regular bread from the bakery, he decides to start buying the day-old stuff for half price.
What happens next? Well, Butch’s spending is Baker’s income. And with Butch’s switch to half-price bread, Baker’s revenues take a hit. So Baker feels the need to cut back as well. He had planned to buy some new candles, but now decides to just squint when reading at night instead.
What next? Well, now Candy is feeling the pinch. And she needs to cut back. So rather than buying steak tonight from the butcher, she instead buys hamburger… reducing Butch’s revenues still further, and forcing him to cut spending even more.
You can see where this is going. Forced to pinch further, Butch now switches to “week old bread.” Baker, stressed out, decides to forgo candles altogether, and just spend the dark night curled up in a fetal position weeping. And Candy? She now downgrades from hamburger to dog food.
So we’ve gone from a functioning island economy to one that has plunged into darkness, moldy bread, and… dog food.
So what happens next? Well, the Keynes Island government decides it needs to do something bold. Austerity! That’s the ticket! Government purchases of baked goods, meat, and candles are slashed by 50%. Hooray!
Yeah, hooray… right into an even more severe depression. And the worst part? The bakery is still just as capable of baking. The butcher is still just as capable of providing meat. And the candlestick maker is just as capable of making candles. Nothing has changed — except that demand for the things they produced has plunged into a downward spiral… a vicious circle of doom.
Now, imagine instead that the government decides to double spending on baked goods, meat, and candles. It announces publicly and boldly. Well, what happens next?
The answer is pretty obvious. All three business owners, now assured of a big spike in demand, begin furiously producing more, hiring more, and… creating more demand, and… ending the depression in one fell swoop.
Sounds easy, right? Yes. Because it is easy. And it has succeeded time and time again, most notably in the Great Depression, when a huge spike in government spending in conjunction with World War Two turned double-digit unemployment into full employment almost overnight.
Okay, okay, I hear your objections. Let’s take them one at a time:
But that money that the government spends has to be paid back!
Yes, it does, but not right away. Once the economy is back on track, the government can run a surplus and start paying it down. In fact, this is essential to keep the economy from overheating and creating inflation.
But the government will then have to pay a fortune in interest on that debt!
Actually, no. Right now, interest rates are at historic lows. The US government is basically able to borrow money for close to zero interest. I repeat, it’s almost free right now for the US government to borrow money.
This sounds like something for nothing! Too good to be true!
To an extent, it is. If demand can be jump-started, and the economy revs back into action, U.S. government revenues (via taxes) will jump, and spending (for unemployment and other aid) will drop. The key is that the government really does need to pay back debt in flush times, something it hasn’t always done. But let’s be clear — even if the government stupidly decides not to pay back the debt in flush times, that still doesn’t make austerity logical in tough times. Pushing the economy further into recession via government cutbacks will be of no help to government revenues.
But what about the money that Butch, Baker, and Candy save by not spending. Wouldn’t that be invested, and wouldn’t that lead to more demand?
In the right circumstances, there’s an argument for that. Let’s say there was bank on Keynes Island. If Butch, Baker, and Candy suddenly showed up wanting to save 2 or 3 times as much as usual, what would happen? Well, the banker would probably think, “hey, people want to save more all of the sudden, so I don’t need to pay as much in interest to entice them.” Maybe he was paying 5%, let’s say, and now only needs to pay 3%.
What happens then? Well, the banker can now afford to lend out money for less. Borrowers who would’ve had to pay 6% can now pay just 4%, and the banker would still have a profit margin. And with borrowers able to borrow at lower rates, a wider range of investments would now make sense. That is, a new factory, store, restaurant, whatever would now have to earn enough to pay back 4% or more to make the investment viable, versus 6%+ earlier.
But here’s the problem — interest rates in the US are now damned close to zero (when you factor in inflation). They really cant go any lower, so additional savings are irrelevant to investments. That is, if an investment can’t justify itself at zero percent, when can it justify itself?
Now obviously I’m simplifying here. And even though interest rates are low, borrowing for many investors is still painfully difficult. But that difficulty has nothing to do with a lack of savings. It has everything to do with a lack of adequate demand, and consequent fear of the future.
But the government wastes money!
Yeah, yeah, and the sky is blue, and milk comes from cows. What else is new? But in the midst of a recession/depression, when consumers and businesses are not spending, the government is the only entity with the power to spend the amounts necessary to jump start the economy.
Net net, the choices here aren’t great, but the “least worst” path forward for the government should be obvious — spend a crapload right now to get the economy moving again. And then once it is moving, start paying down our debt.
Austerity, on the other hand? Well, government cutbacks might sound good, and feel somehow righteous and moral. The trouble is, it would be fucking idiotic. With a capital “F.”
The path forward is obvious. Now if our officials only had the guts to actually do it…