The real problem is on the demand side of the economy.Yep, government spending, that bugaboo of the right, might be the best thing America can do. It might be the ONLY thing America can do.
Consumers won't or can't borrow because they're at the end of their ropes. Their incomes are dropping (one of the most sobering statistics in Friday's jobs report was the continued erosion of real median earnings), they're deeply in debt, and they're afraid of losing their jobs.
Introductory economic courses explain that aggregate demand is made up of four things, expressed as C+I+G+exports. C is consumers. Consumers are cutting back on everything other than necessities. Because their spending accounts for 70 percent of the nation's economic activity and is the flywheel for the rest of the economy, the precipitous drop in consumer spending is causing the rest of the economy to shut down.
I is investment. Absent consumer spending, businesses are not going to invest.
Exports won't help much because the of the rest of the world is sliding into deep recession, too. (And as foreigners -- as well as Americans -- put their savings in dollars for safe keeping, the value of the dollar will likely continue to rise relative to other currencies. That, in turn, makes everything we might sell to the rest of the world more expensive.)That leaves G, which, of course, is government.
So the crucial questions become (1) how much will the government have to spend to get the economy back on track? and (2) what sort of spending will have the biggest impact on jobs and incomes?The nice thing about government spending, when properly done, is that the spending can end up having a double-down effect. Yes, you get the value of the money being injected into the economy and the under-utilized capacity being employed for things. But you also get the end product, which—if properly chosen—helps raise the efficiency and productivity of America in-and-of itself.
The answer to the first question is "a lot." Given the magnitude of the mess and the amount of underutilized capacity in the economy-- people who are or will soon be unemployed, those who are underemployed, factories shuttered, offices empty, trucks and containers idled -- government may have to spend $600 or $700 billion next year to reverse the downward cycle we're in.
The answer to the second question is mostly "infrastructure" -- repairing roads and bridges, levees and ports; investing in light rail, electrical grids, new sources of energy, more energy conservation. Even conservative economists like Harvard's Martin Feldstein are calling for government to stimulate the economy through infrastructure spending. Infrastructure projects like these pack a double-whammy: they create lots of jobs, and they make the economy work better in the future. (Important qualification: To do this correctly and avoid pork, the federal government will need to have a capital budget that lists infrastructure projects in order of priority of public need.)
Government should also spend on health care and child care. These expenditures are also double whammies: they, too, create lots of jobs, and they fulfill vital public needs.
So what's the problem? Well, there's a big deficit. Maybe now's not the time. Or maybe tax cuts would be preferable. Reich response to that, too:
Having a deficit, or raising a deficit, during an economic downturn is normal and to be expected. Slaying a deficit is the job of governments in sunnier times, when they're more concerned with dampening "irrational exuberance." And Reich makes excellent points about spending vs. income tax cuts: with government spending you can target that spending at efficiency-raising objectives, whereas tax cuts are likely to simply be stuffed in some metaphorical mattress.
Expect two sorts of arguments against this. The first will come from fiscal hawks who claim that the government is already spending way too much. Even without a new stimulus package, next year's budget deficit could run over a trillion dollars, given the amounts to be spent bailing out Wall Street and perhaps the auto industry, and providing extended unemployment insurance and other measures to help those in direct need. The hawks will argue that the nation can't afford giant deficits, especially when baby boomers are only a few years away from retiring and claiming Social Security and Medicare.
They're wrong. Government spending that puts people back to work and invests in the future productivity of the nation is exactly what the economy needs right now. Deficit numbers themselves have no significance. The pertinent issue is how much underutilized capacity exists in the economy. When there's lots of idle capacity, deficit spending is entirely appropriate, as John Maynard Keynes taught us. Moving the economy to fuller capacity will of itself shrink future deficits.
The second argument will come from conservative supply-siders who will call for income-tax cuts rather than spending increases. They'll claim that individuals with more money in their pockets will get the economy moving again more readily than can government. They're wrong, for three reasons. First, income-tax cuts go mainly to upper-income people who tend to save rather than spend. Most Americans pay more in payroll taxes than in income taxes. Second, even if a rebate could be fashioned, people tend to use those extra dollars to pay off their debts rather than buy new goods and services, as we witnessed a few months ago when the government sent out rebate checks. Third, even when individuals purchase goods and services, those purchases tend not to generate as many American jobs as government spending on the same total scale because much of what consumers buy comes from abroad.
Sure, all this goes against conservative orthodoxy, and that's likely to get a serious stimulus package some serious resistance from the Republicans and their Village lackeys. But Reich is right: now is no time for worrying about the budget deficit, and certainly no time for supply-side bafflegab. The American people clearly don't care for that right-wing orthodoxy any more, big progressive mandate and whatnot, so president Obama should ignore that nonsense and do what's necessary.
Edit: And what KIND of infrastructure would be a good idea? Well, I've got three ideas, albeit similar to Reich's: Transportation, Energy, and the Internet.
On transportation, I'd say the most effective investment is simple to name: high speed rail. Acela's nice, but there is far more to be done: the tilting trains and constant-tension catenary that allows for true high-speed transit will require major track upgrades, and the whole thing needs to be brought to other regions around the United States, instead of just concentrating in the Northeast. This would not only reduce reliance on personal automobiles and carbon-belching jet travel AND increase worker mobility, but it would allow for a major chunk of American transportation to be powered through the electrical grid, instead of internal combustion.
(Whether that can be applied to freight is unknown, but frieght definitely would benefit from a move to rail, too. The difference in energy cost between rail and trucking is enormous.)
On energy, I'm hearing a lot about a "smart" energy grid. Obama's plan talks about how "Barack Obama will pursue a major investment in our national utility grid to enable a tremendous increase in renewable generation and accommodate 21st century energy requirements, such as reliability, smart metering, and distributed storage." Sounds good to me, and as part of a move from internal combustion-powered transportation to grid-powered transportation it's very, very smart.
(And to the extent it encourages reverse metering, where homeowners can actually supplement their income by providing more energy than they consume, it's vital.)
But the most important investment is the Internet. Make no mistake: commuting in the 21st century will be telecommuting. We're already seeing the growth of decentralized intellectual production; that isn't going anywhere. but up. And with countries like Korea and Japan building enormous telecommunication advantages, America needs to keep up. And yet where are things going? Towards capping Internet usage, trying to choke users off from using in a month what a Korean can use in a day. America's size is the excuse you often hear, but that excuse won't mean a damn thing to anybody thinking about where to locate their offices and hire their workers.
America needs fibre to the home. It needs fibre to the firm. It needs high-speed, ubiquitous wireless networking. It needs cheap, safe cellular telephony. It needs to light up those dark pipes, and upgrade them for more capacity, and then put in more upgraded pipes right beside them. And because the telecommunication companies have been pathetically inadequate at doing anything but inventing new ways to screw people out of their money and discourage innovation at every turn, the government might well have to directly intervene to get this done.
(Education and health care are key issues too, of course. But they aren't infrastructure. They're just common sense.)