Seeing Washington’s response to impending recession is like watching bears at play. The package Congress proposed at the end of January was a limp measure that smacked more of designer impotence than macroeconomic thrust.
The plan’s proponents pretended that handing out cash to individuals would promote spending and get the economy up and screaming, but there is little chance the cash injection will penetrate in any meaningful way. With the over-extended credit of most Americans, not least those about to default on subprime loans, the money will be more of a welcome contribution to debt relief than a provocation to shopping sprees.
Indeed, those sufficiently frugal not to be in debt are probably sensible enough to put the money aside for the looming rainy days all the talk of recession presages. But those hard-core consumers who do rush out to spend their IRS checks will stimulate only the economy of China, thereby exacerbating the underlying problems of trade and fiscal deficit that have brought us to where we are – because so much American manufacturing has been exported to places like China that any consumer spending ends up over there.
Equally, there is little or no evidence tax breaks for business will do anything more than transfer yet more wealth to the small percentage of CEOs and owners who have amassed more of the country’s cash than at any time since the robber barons ravaged the country – though at least the robber barons built the oil, steel and rail infrastructures that were the foundation of the country’s rise to economic preeminence. The financial engineers and hedge funds will leave not even the tiniest shrub to mark their passing.
We may have to go back to the now not-so-New Deal. Admittedly, that culminated in the best stimulus of all: a big war during which the government taxed heavily and spent lavishly in a targeted way. Of course, we are already in a war (or two, or three), but this is perhaps the first war in history where the belligerent government has cut taxes heavily while borrowing the money to finance hostilities, not from the public in the form of war bonds, but from the country most Americans would probably point to as their fastest-growing political and economic rival.
For decades the economic consensus in Washington has been prejudiced against public spending, except on corporate welfare or the Pentagon (sometimes it is hard to tell the two apart). As a result, US cities are filled with potholed roads, bridges about to fall down, and schools that need refurbishing both physically and intellectually.
Spending on these puts money directly into the domestic economy without pulling in imports, and invests in the future of the US and its citizens. An expansion of railways and public transit systems not only boosts the economy, but also reduces dependence on imported oil. And investment in education and training produces human capital that ensures an advanced future economy.
In fact, the best stimulus is to hit the G-spot: government. Washington’s spending on infrastructure would result in a lasting investment in both physical and human capital – and lots of smiles and satisfaction all round.
