In a spirited defense of the President, Andrew Sullivan — whom I call a conservative but most of the current Republican crowd does not — goes after Drew Westen’s New York Times piece, which I mentioned in a previous post. What interested me in Sullivan’s response is his intuitively appealing — but economically uninformed — attack on the idea of aggressive fiscal stimulus. Sullivan writes:
To take just one point, does Westen believe that, after TARP, a much bigger stimulus would have been able to get through Congress? And for what? These are not the 1930s, and in a much higher tech society, Depression era shovel-ready projects were not so easy to find. And the aversion to tax cuts seems strange. Aren’t they among the most effective way to stimulate demand quickly? And how much debt would we now have with such a stimulus? The trouble with telling stories is that fiction isn’t fact. And Obama faced a country that had become so leveraged in public and private that the 1930s option Westen wanted was a chimera. Is $14 trillion not enough debt?
Some of these arguments are similar to those made by a friend recently, as I’ve described. It’s hard to know what would have gotten through Congress if Obama had swung for the fences when he first took office. But, politics aside, the rest of Sullivan’s substantive objections are not strong ones. While “shovel-ready projects were not … easy to find” in the beginning, we’re now three years down the road. That’s ample time to find and plan worthwhile repairs and needed improvements to the nation’s infrastructure. But the biggest fallacy in Sullivan’s reasoning is also the one that initially seems the most intuitively appealing — i.e., that a nation with a $15 trillion dollar economy and $14 trillion in debt cannot afford to spend another $2 trillion to dig itself out of a deep and dangerous hole. Of course we can. We cannot afford not to do so.
Standard and Poor’s — those clowns, (as I write this, interest on the U.S. long bond is even lower than it was before the downgrade) — did not downgrade us out of concern that we do not have the money to pay our debts. Their concern was that we do not have the political will to make and effect the correct governmental choices. Westen’s point — and mine too — is that the President has not done all he should to drum up the necessary political will. We all hate to turn over hard-earned money to Uncle Sam, but the tax burden in this country is among the smallest in the Western world. Taxes here are far lower than in the countries we generally compare ourselves to. And aggressive fiscal stimulus would create significant net tax savings over time. Direct savings to Federal and state governments would accrue from reduced expenditures on Medicaid, unemployment compensation, and “welfare” (i.e., TANF). And the increased aggregate demand generated by these newly employed folks would lead to more new hires in the private sector, many of whom would be moving from the “dole-receiving” to the “tax-paying” side of the ledger. Economists might debate how long it would take for this virtuous cycle to sustainably take hold, but there is not serious disagreement over whether these effects would be seen.
Where would the money come from, Sullivan asks. We could easily raise taxes on individuals whose spending would not be impacted by that move, the most fortunate in our society. The expiration of the so-called “Bush tax cuts for the rich,” for example, would raise a few trillion, and those are slated to expire automatically unless Congress acts to preserve them. Another route, one that would maximize the favorable economic impact in the short run, would be for the government to “borrow long” by selling treasuries bonds. How much would that add to our debt burden over time? Not much, compared to the size of our economy. To repeat what I’ve said several times, WE CAN NOW BORROW LONG-TERM MONEY AT LESS THAN 2.5%. That’s more or less free money, on an inflation-adjusted basis. So a substantial additional stimulus plan is the obviously correct thing to do now, and it is a relatively low risk thing to do compared to the alternatives.
One of the things that is so often missing from pieces like Sullivan’s is an acknowledgement of the long term economic consequences and social risks that go along with having 20 million long-term unemployed, more unemployed (by head-count not by percentage) than in the Great Depression. Because they cannot find work, some who would not otherwise have done so will turn to prostitution, to selling drugs, or to property crimes like burglary. Some will become addicted or fall into other disorders of the kind that can ruin the lives not only of the parents, but their children. These long-term social and economic consequences of our collective fear to invest money in our own future are not easily tallied, but they are surely quite substantial. To me that $2 trillion additional expenditure is looking to be a better and better deal all the time.