Last Friday, in his column in The New York Times, Paul Krugman fired back against what he calls “the sudden ubiquity of deficit scare stories.” Krugman claims that the short-term deficits are no cause for major concern. He equates the current “hysteria” with the groupthink prevalent amongst Americans in 2003, which helped support the decision to invade Iraq. Then and now, individuals were making assumptions backed with little or no empirical evidence.
Overall, Krugman is right. There is no cause for alarm in running short-term deficits. Certainly, short-term deficits do not threaten our economic recovery. After all, how else do we create jobs during a recession? The banks are not lending. Companies have excess inventory, which is why they won’t hire the seven million extra people who are unemployed. Those who are employed have changed their consumption habits and are saving more or paying down debt. So, who is capable of jump-starting the economy?
The answer is government.
No other institution has the kind of borrowing power needed and no one else can use it as efficiently.
However, how we use those deficits is cause for concern in determining how we will reach economic recovery and pay down our national debt.
Though I agree with Krugman on short-term deficits, when it comes to job creation he should be more explicit.
Krugman and the majority of leftist economists consistently cite the Great Depression and the New Deal legislation that came about in its wake as the template for solving our current economic crisis.
Don’t misunderstand me; there is much to be learned from the Great Depression.
However, looking back on the 1930’s and the postindustrial state, the questions of resource depletion, climate change, and sustainable production were not on the table. In addition, it is hard to know whether the United States would have experienced the kind of economic prosperity it did without the events of World War II, which left every major industrialized country – with the exception of the United States and Russia – in both physical and economic ruin. Those conditions provided the platform for forty years of U.S. economic prosperity.
Today, there is cause for alarm. Today there is no Europe lying tattered in ruins. Moreover, the United States has moved beyond its position as a major exporter.
Americans should not be concerned about running short term deficits, but certainly about how we use those short-term deficits to facilitate sustainable economic growth – growth sufficient to pay down our national debt.
These are extraordinary times:
Rising income inequality over the last decade failed to spur new capital investment. Tax cuts for the wealthy provided a savings rate of 23 percent for the top fifth percent of households; the bottom eighty percent did not save money. Those savings were not used for investment. From 1999 to 2005, in sectors other than real estate, investment in machinery, equipment, technology, and structures increased only 1.4 percent. The long-term impacts of such failed investment will result in a generation of recent graduates less likely to experience long-term economic security. The psychological and emotional cost to society of a generation failing to achieve a sense of self-actualization will be hard to measure.
Something must be done.
However, looking at the Recovery and Reinvestment Act, some $200 billion worth of funds have been distributed: $92 billion in the form of tax cuts and credits, $74 billion in the form of grants, contracts and loans, and $105 billion for entitlement programs.
None of the stimulus is overtly job creation.
This may be for political reasons.
Regardless, the upside to this recession is that it has overwhelmingly revealed that free markets and trickle down tax cuts do not lead to more investment or employment.
This conclusion paves the way for alternative means for economic stimulus through job creation, such as Employer of Last Resort. ELR is when government steps in and creates jobs directly. The two most famous programs are Argentina’s Plan Jefes de Hogar (Heads-of-Household Plan) and the New Deal agencies: the Works Progress Administration and the Civilian Conservation Corps. In both cases civilians engaged in the provision of community services and/or worker training programs. In Argentina ELR is still in progress.
Unfortunately in the case of the New Deal agencies, funding was too little and those programs have since been eliminated.
The ELR is part of a broader and more heterodox way to view the economy – where the rules of economics are re-written in order to address the concerns of the real world – not the models found in conventional micro- or macroeconomic textbooks.
A reality we should be willing to face is the possibility that Americans may have to adjust to living with less. The threats of climate change and resource depletion are real and may mean that the costs to living become unaffordable for the majority of people around the world. It may be worthwhile to invest in job creation programs that educate communities on ways to be self-supporting. For example, adapting urban environments to grow, cultivate and harvest their own food.
In the end, there are many ideas about how best to invest in job creation and the conversation is worth having.
As I mentioned before, history shows that the ELR programs of the New Deal were too small. Moreover, the Recovery and Reinvestment Act currently lacks enough emphasis on direct job creation. If there is any hope of America avoiding decades of lost production and growth we should move drastically away from the conventional methods of economic stimulus and embrace ones that are proven to be effective.