Second Stimulus vs. Austerity Measures

As we continue to spin our wheels in what, at best, could be described as a stagnant economy, the debate over the best economic course of action going forward is about to pick up additional steam.  We find ourselves at a critical time in terms of the health of the world economy and the decisions that will be made over the next few months will be dispositive on the question of how much longer the economic crisis will last and how much more painful it will be.

The debate largely centers around two opposing schools of thought - the Keynesian model, championed by Nobel Prize winning economist and Princeton professor, Paul Krugman, and those who oppose that approach (they go by many names - Anti-Keynesian is about as accurate as any other name one could ascribe to them).  The latter approach has the unflinching support of the vast majority of economic conservatives both in the U.S. and abroad and, as it happens, most of the current leaders of the world's largest economies.

In the simplest terms, the debate concerns whether governments should engage in additional stimulus spending while basically ignoring deficits in the short term so as to encourage economic growth, job creation and consumer spending (the Keynesian approach) or, as the Anti-Keynesians would prefer, enacting strict austerity measures to reign in government spending so as to balance budgets as soon as possible, putting greater emphasis on the long-term health of the overall economy.

A valid argument can be made that the Anti-Keynesians’ approach to fixing the economy, while necessitating painful decisions in the short term, would have greater results for the economy in the long term.  Arguments on that side of the debate that continued deficit spending in the face of an already weak economy will only lead to passing on the costs of fixing our present problems to our children and grandchildren cannot be dismissed out of hand because, frankly, that’s inarguably true. 

While deficits have never been particularly popular here in the U.S., that’s rarely prevented us from running huge ones, even in times of economic prosperity.  The political landscape today, however, is very different than before the Great Recession began.  The general public is experiencing genuine fear about our economic future, given the events of the past few years and, even without a degree in economics, it’s fairly simple to conclude that spending more than a trillion dollars that we don’t have just isn’t a very good idea.  Doing so repeatedly is even less of a good idea.

That being said, the Keynesians have a valid point as well that, in the face of real unemployment in the double digits, dramatically lowered consumer spending and the very real threat of deflation looming, jump starting the economy with another  healthy dose of government spending is the only way to spark a true recovery and, on balance, it’s more dangerous for the government to reign spending in at present than to continue to rack deficits up.

The American Recovery and Reinvestment Act of 2009, also known as the Obama Stimulus plan, was a $787 Billion attempt to ignite an economic recovery in the wake of the sub-prime mortgage market disaster, the $700 Billion TARP program, frozen credit markets and a hemorrhaging job market.  All of that spending was separate and apart from the bailouts of the auto industry, the banking industry and the insurance industry, leaving the general public with the impression that, despite all that spending, we’re still stuck in a rut and, therefore, the stimulus simply didn’t work.

Any fair-minded economist will concede, however, that had we not passed the $787 Billion stimulus package last year, the economy would be in a much worse position than it is today.  That, however, is a terrible platform on which to wage a campaign for election.  “Hey, it coulda been worse” just won’t fly with the American public, even if it’s absolutely true and, therefore, even the more liberal members of Congress running for re-election have to pander to the palpable anger of the American electorate by playing the part of a deficit hawk.

Tackling this enormous issue will take a tremendous amount of political courage and it may even cost many otherwise excellent Senators and members of Congress to lose their jobs, however; rather than caving in to the demands of the largely uneducated masses clamoring for budget cuts, true leadership demands a recognition that budget cuts alone will do nothing to spur economic activity, job growth or recovery.  In fact, it may do just the opposite. Exercising fiscal discipline now, given the unprecedented challenges we face, is not necessarily the wisest course of action as there’s no guarantee that the future will not usher in its own set of additional challenges.  The only way for austerity measures to actually work towards restoring the long term health of the economy is if no additional economic challenges were to be encountered during the recovery.  Given the volatility we’ve seen in recent years, it would be foolish to expect smooth sailing ahead as there’s simply no evidence to support such a rosy outlook on the future.

A second round of stimulus spending of the type we’ve seen already, however, is unlikely to garner much support given the mood of the country which sees no results, despite trillions of dollars spent.  Therefore, I believe it’s time for a radically new approach to economic stimulus, one that I’ve been advocating for since early 2009.

I believe that now is the time we give serious consideration to forgiving the outstanding student loan debt for all Americans so as to spark a real and sustained economic recovery – one that puts hundreds or, in some cases, thousands of extra dollars per month, every month into the hands of hard-working, middle class Americans saddled with mounds of intractable student loan debt. 

As laid out in the proposal I first drafted in January, 2009, such an approach to economic stimulus would be geared towards rebuilding the economy from the bottom-up, as opposed to the trickle-down method we’ve become so accustomed to over the last 30 years – an approach that’s left millions of middle class Americans behind.  For a mere drop in the bucket as compared with what has been and will likely continue to be spent for little, if any, results, such an approach to economic stimulus would not only allow millions of Americans to spend money they otherwise wouldn’t have on ailing sectors of the economy, but it would go a long way towards restoring faith in a government largely seen as inept and incapable of addressing the real concerns of everyday people who continue to bear the brunt of the near-collapse of our economy.

The details of the proposal can be found by following the link above and, therefore, I won’t reiterate the mechanisms behind how it would work here but, suffice it to say, drastic times call for drastic measures.  Considering the enormous amount of debt we’re already carrying as a nation, the benefits of student loan forgiveness as a means of economic stimulus would far outweigh the costs, particularly if doing so would immediately spark consumer spending, which normally accounts for 70% of our G.D.P.  If consumers resume spending, businesses can re-stock their inventories and hire additional workers and real, sustained economic growth can begin.  We stand to lose very little by trying such a novel approach to economic stimulus and the benefits of it working as intended are potentially enormous. 

In the end, unburdening millions of Americans who did nothing wrong other than seek to better themselves and to better contribute to society through education would be an incredible recognition on the part of Congress and the Administration that they truly understand the struggles of the average American in 2010.  That it also has the potential to be the silver bullet for getting back on the path of economic prosperity would just be the icing on the cake.