In the Nation's Interest
We needed a fiscal stimulus yesterday
The need for fiscal stimulus is clear. The unemployment rate is at 6.7 percent and rising. Some forecasts expect the unemployment rate to reach 9-10 percent in 2009. Under-employment, which includes those who want full-time work but either settle for part-time work or stop looking altogether, reached a fourteen-year high last month. Financial markets continue to ossify as lenders deleverage, rebuild capital, and tighten lending standards. Consumers and businesses alike have become more attuned to risk and the potential for price deflation, which leads them to hold back on investment and spending. Retail sales continue to fall alongside stock prices. The "big three" U.S. automakers soon could become just one, two, or none at all.
Our future standard of living is dependent on our policy response to the present crisis. That response has already driven up the federal budget deficit, ad it will be necessary for the budget to go further into the red. We should not be afraid to spend what is necessary to pull the nation out of a potentially deep recession. Not acting would do even more damage to our fiscal standing.
Of course, we cannot overspend indefinitely. A culture of consumption is partly to blame for our current predicament. We need a long-term plan to help us move toward a more balanced economy; we cannot exit the other side of this crisis with a chronic deficit and a public debt so bloated that the federal government's own paper becomes toxic, leading to inflation and a plunging dollar. Increased spending now should be designed to boost private-sector income in the long term. Where possible, it should be temporary or carry explicit phase-out provisions.
Another round of tax rebates is the wrong approach. It would either feed our consumption habit or be diverted into savings. Either way, it wouldn't address our problems. It is hard to say for certain what happened to the 2008 tax rebate, but we know it didn't forestall a recession. To the extent taxpayers actually spent the money on consumer goods it may have done more to create jobs abroad than at home.
We've heard several good ideas to stimulate the economy. One is to help the unemployed and state governments, both of which need temporary assistance and are certain to spend money received. Another is to direct funds to investment rather than consumption. Spending on infrastructure and public education expand potential future income and standard of living. Such spending would satisfy two goals. First, repairing roads, bridges, ports, developing new energy sources, building better schools, and training teachers directly puts people to work. Second, well-chosen investments will generate returns over the long run. Better roads and new energy technologies will benefit everyone. Improvements in education will yield a more productive and innovative workforce.
Spending on infrastructure, of course, takes time. The Transportation Department estimates that even for projects ready to go, only a quarter of the cost is spent within the first year. But the current recession doesn't seem likely to abate anytime soon. In fact, a number of economists advocate for spending on infrastructure in part because they expect the recession to last well into 2009, if not longer. As states across the country face budget shortfalls, cuts to infrastructure spending seem imminent. According to the news reports, Maryland and Virginia already have cut more than $1 billion each from their six-year transportation programs. North Carolina plans to cut $200 million by next June, while New York intends to eliminate 10 percent of its infrastructure projects. A temporary increase in federal spending could offset these cuts.
Some reforms are worth enacting not just because they provide a temporary stimulus but because they provide more lasting benefits. For example, we should not delay acting on much needed healthcare reform. Health care that is accessible, affordable, and based on medical best practices ensures a healthy society and productive workers. And reform is needed not only for its intrinsic value, but also to address unsustainable government and personal spending. The nation cannot continue a rising trend of spending on healthcare, which already has reached 16 percent of GDP - roughly twice the level of comparable nations.
Global warming and dependence on foreign oil are two additional issues that cannot be shunted aside until later. A carbon tax or similar policy is needed, but imposing new costs on business during a recession makes little sense. Why not go ahead and show our willingness to address these issues by passing legislation with a trigger that would delay implementation until the economy was healthier?
For the past couple of years, CED has promoted policies for business that lean against the prevailing winds of "short-termism." We have encouraged business leaders to think and act on the sustainability of their enterprises rather than in pursuit of short-term profit. But, we have been cognizant that short-term profits are also important, and sometimes getting through a short-term crisis is necessary just to keep the business alive as a going concern. CED has promoted a similar view of the overall economy: policy should seek long-term balance and sustainability, but countercyclical policies are appropriate to help us achieve long-term goals. And that is good advice for today's economic policy makers: keep long-term goals in mind but please act now. Our problems are too urgent to wait.
Commentaries are the views of the authors and do not necessarily represent policies of the Committee for Economic Development.