What’s the right path?
Schenk: The government should extend unemployment insurance benefits and provide more aid to local and state governments to build roads, highways, runways, and bridges. More home buyer tax credits, appliance rebates, and programs such as Cash for Clunkers would also spur consumer spending. So would tax cuts. We need this stimulus.
What Do You Think?
Will stimulus or austerity create a faster economic recovery? Vote now.
Rick: Wrong, Mike. This environment demands fiscal discipline. We should cut spending and raise the economic base to grow tax revenue and reduce the deficit. An increase in deficit-financed spending will just be offset by a reduction in private-sector spending as consumers increase their saving in anticipation of future higher taxes.
Schenk: But we have 15 million unemployed, 9.5 million underemployed, more than three million people who want to work but haven’t looked for a job in the past month, and about one million people who’ve given up looking for work. Unemployment nationally is at 9.6% but the adjusted unemployment rate is closer to 17%.
That means substantial financial hardship for tens of millions of Americans and the potential for huge, long-term societal issues such as big increases in crime, divorce, and substance abuse.
Low interest rates aren’t stimulating the economy because of excessive household debt and banks’ tight underwriting standards. So monetary policy is impotent. We need government intervention to hasten the recovery and buy time for consumer confidence to recover.
Government needs to spend when consumers don’t.
Rick: But government intervention will only prolong the rebalancing needed to fix this economy. We should let market forces work to restructure the size and composition of the economy—further deleveraging, additional saving, asset depreciation, and rising exports.
The French economist Jean-Baptiste Say once said that supply creates its own demand. We need companies to regain confidence about the future so they invest and hire more workers. These new jobs will create the income needed to fund new spending.
Schenk: New jobs? What new jobs? The economy is growing at a paltry 1.6% annual rate. If growth continues at that rate, the economy won’t generate enough new jobs to absorb new entrants into the labor market. We need to create about 150,000 new jobs per month to absorb all of these new workers.
Rick: Let’s not panic. We’re in a self-sustaining recovery. And, in a typical recovery, there will be ups and downs. Don’t worry—the economy will recover.
We shouldn’t interrupt the structural realignment of our economy. We need to move jobs and capital away from the home building, auto, and financial sectors into other sectors of the economy where we expect spending to be in the future, the export sector.
Plus, government consumption and investment has been growing at a 5% to 7% annual clip for the past few years due to the Bush and Obama stimulus plans. That’s a much faster rate than overall economic growth, creating huge deficits. These deficits only create the incentive for people to save more money today because they’re anticipating higher taxes in the future.
Schenk: Spoken like someone who has a job.
Next: Some bright spots