Public Spending Still Key to Economic Recovery

Mark Weisbrot
Kansas City Star (MO), January 3, 2010

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There are right-wing voices claiming that the government is an obstacle to economic recovery in the United States, irresponsibly piling up debt, burdening future generations, and ruining the investment climate. For them, we only need to rely on the private sector to get us out of our worst slump since the Great Depression.

It should be recalled that it was the excesses of the private sector, and especially the financial sector, that caused this economic collapse. To the extent that the government is responsible, it is that it failed to contain these excesses,  and allowed an $8 trillion housing bubble to accumulate without so much as a simple warning to the public. This made a serious recession inevitable.

For conservatives to insist that we now rely only on the private sector for economic recovery is a bit like Bernie Madoff starting a new mutual fund from prison with the slogan, “trust me.”

It is also at odds with the actual economic situation, as well as basic economic logic and accounting. While it is true that the economy grew in the third quarter of this year – for the first time in nearly two years -- there is less here than meets the eye. This was weak growth for a recovery from such a deep recession – just 2.8 percent annually.

Consumption, which is most of the economy, was responsible for most of the growth – but the bulk of this was a result of the government’s “cash for clunkers” program spurring auto sales. Private investment finally grew, for the first time since the recession began, but this was driven by inventory accumulation. It is hard to imagine a sustained recovery when businesses do not see enough light ahead to invest in machinery, equipment, or structures. And private investment has plummeted over the last two years – it is still down more than 30 percent.

Add in a big oversupply of commercial construction, a weak housing market with foreclosures still adding to supply, and double-digit unemployment, and we do not have the foundations for private spending – either investment or consumption -- to bring us a sustained recovery. The fall in the dollar helps, and this recession would have been even worse if not for the improvement in our trade balance, but the foreign sector cannot lead this recovery. That leaves public spending, for now, as our best hope.

Contrary to the complaints of the right, the problem is that the fiscal stimulus has been much too small, amounting to less than one percent of GDP, taking into account the cutbacks by state and local governments. This is just a fraction of the private spending lost from the collapse of the housing bubble.

Economists John Schmitt and Dean Baker of the Center for Economic and Policy Research have calculated  that the lost wages from 2008-2012, as a result of the recession, will top $1 trillion – more than the estimated 10-year cost of health care reform. The non-partisan Congressional Budget Office estimates unemployment at more than 7 percent in 2012. This is a lot of unnecessary suffering for millions of people.

Congress passed its first stimulus package in February of 2008, when unemployment was 4.8 percent. Should we now accept millions more jobless as “normal,” just because Wall Street traders are getting rich again?

As for the U.S. public debt, it was 122 percent of GDP in 1946, which initiated an era of nearly three decades of solid growth that was – unlike in the post-Reagan era – broadly shared. Our 2009 gross federal debt of 81 percent of GDP should be the least of our concerns; we can worry about it when employment has recovered. Until then, it will be the government’s role to steer the economy out of this current mess.

Mark Weisbrot is co-director of the Center for Economic and Policy Research, in Washington, D.C. He received his Ph.D. in economics from the University of Michigan. He is co-author, with Dean Baker, of Social Security: The Phony Crisis (University of Chicago Press, 2000), and has written numerous research papers on economic policy. He is also president of Just Foreign Policy.