"In for a penny, in for a pound," goes the old saying. In the contemporary Washington fiscal universe, perhaps the amounts should be revised: "In for a billion, in for a trillion." The point of the saying is that sometimes moderation is not the best strategy, that once a plan has been adopted, one can kill it be looking back over one’s shoulder, and that if you truly judge yourself to have a winning policy (or poker hand), then you should not be reluctant to raise the bet as needed.
This morning’s Washington Post has a great column by E. J. Dionne in which he examines why the Democrats in Congress should not be reluctant to continue stimulating the economy. He quotes Larry Summers: "Spurring growth, if we can achieve it, is by far the best way to improve our fiscal position." Summers, who is hardly a spendthrift, knows that in a fragile economy, government may be the only actor willing and able to jump start the economy. This is Keynesian econ 101.
The Republicans have no, repeat no, alternatives. The screech about the Democrats spending too much, but they threw away the government surplus when they had the chance, enacted a hugely expensive Medicare drug benefit without raising a dime of revenue to pay for it, and went to war in Iraq, conveniently keeping the expenses of that war off the books. With that kind of track record, they are the last people to consult on the issue of fiscal health, but even if you were so inclined, their all-purpose remedy – tax cuts – would hardly achieve the kind of direct economic stimulus the nation needs. As with the tax cuts in last year’s economic stimulus, too many people pocket the money and wait for a healthier investment climate. As for stimulating investment, only when there is a dramatic drop or increase in tax rates do they have a significant effect on business and investment decisions.
The whole point of a stimulus is to get the money into the economy now, and the best way to do that is to prevent lay-offs of teachers and firefighters and police. It is a fair question, and curiously a question the Republicans seem unwilling to ask: why not let the states and localities raise the money to pay the teachers and the firefighters and the police. After all, at a local level, the services are even closer to the taxpayer. That firefighter might also be a neighbor and that teacher a fellow parishioner. In my hometown in Connecticut, the town meeting was always forthcoming with the money needed for a new ambulance, although there were great fights over the school budget. But, still, why not let the local governments raise taxes and keep the payrolls going? The economic reason is that in a recession only the federal government can borrow money against the future so it makes sense for them to help states and localities, which must balance their budgets, across this rough patch. Tax cuts are not an elixir, but raising taxes is ill-advised in a recession too.
I hope the Obama administration is in touch not only with the teachers’ unions and the firefighters’ unions and the police unions, but that they are reaching out to Republican mayors and governors, those who are facing the budget crunches at the local level and who need federal help. They may not share the doctrinaire stance taken by the Republicans in Congress.
There is a time to look at fixing the federal deficit, but there will be no fixing it until will pull the country out of the recession. We all seem to have forgotten how close to the edge of total, 1929-quality, collapse the economy was in the last months of the Bush administration. People have forgotten that in September 2008, yields on short-term Treasury bills dipped below zero, $400 billion was withdrawn from money market funds in one night (as opposed to the typical $5 billion) and the entire economic system teetered on the brink. We are not looking into that deep abyss anymore, but we have a long climb out of the rut.
The enactment of health care reform that begins to bend the cost-curves down was the second most important step toward achieving long-term fiscal health for the government and the nation. The most important step is to keep the recovery moving forward, to stimulate the economy so that it can begin to grow again on its own. I am with EJ: I understand why the Republicans oppose such a stimulus, but it is bizarre why the Democrats are now hedging their bets.