In the 3rd quarter of this year, our economy grew at an annualized rate of 3.5%. Good news?: yes. Is everything all better?: definitely not. A lot of economists are predicting a so-called "jobless recovery." On top of that, it's entirely possible that reduced demand from unemployment and a continuing credit crunch might drag our economy back down. Our government has a lot more work to do to fix the economy.
Nobel laureate Paul Krugman has been calling for more and more effective (ie. less tax cuts, more direct spending) stimulus in his NY Times column for a long time. His column today continues that motif and lays out an excellent case for more economic stimulus.
He writes that the growth numbers show that the stimulus is working. That spending will continue to go out over the next year and a half. However, the rate at which it is going out, and thus its effect on growth, is currently peaking, meaning that the stimulus won't continue to increase growth. If that rate of growth is going to continue, private spending will need to increase as the stimulus tapers off by the end of 2010. Krugman doesn't see that happening.
On top of that, even if growth continues, it will take an unacceptably long time to put a dent in unemployment. Krugman points out that our 3.5% annualized GDP growth rate in the 3rd quarter is roughly the same as annual growth during the Clinton administration, very interesting. If job creation proceeds as it did at that growth rate in the 90's, it would take a decade to get to "something like full employment."
So it's clear that we need more stimulus, despite the huge deficit resulting from Bush-era tax cuts for the wealthy, the creation of Medicare Part D, and immoral and unnecessary wars. The deficit hawks on the right and left worry that our debt-fueled stimulus will present a big debt burden in the form of higher taxes to the next generation of Americans. As Krugman writes, that generation, my generation, is feeling unemployment the most (yes I am one of them). Krugman's colleague Bob Herbert at the Times had a great column on that subject on Saturday. High unemployment will be a huge drag on our generation for an extended period of time, not just directly through unemployment but also through unemployment hampering growth.
That argument alone trumps the deficit hawks' weak arguments. However, he adds something I hadn't thought of:
Even the claim that we’ll have to pay for stimulus spending now with higher taxes later is mostly wrong. Spending more on recovery will lead to a stronger economy, both now and in the future — and a stronger economy means more government revenue. Stimulus spending probably doesn’t pay for itself, but its true cost, even in a narrow fiscal sense, is only a fraction of the headline number.It almost echoes the supply-side argument of the Reganites except in reverse. And except that it actually makes sense.
So will the Obama administration and the Democrats in Congress push for more deficit spending to fuel stronger re-growth in our economy? Right now they're patting themselves on the back for how the stimulus worked, and they should. However, they need to move forward on job creation, and currently it doesn't look they will.
In the meantime, they seem perfectly willing to borrow money to continue a war in Afghanistan. Sounds like they got their priorities straight, huh?