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September 6, 2010

Hoping for an Effective Stimulus Without Change

Carroll Andrew Morse

Victor Davis Hanson has an interesting post at National Review's The Corner, on why borrowing more money won't act as a stimulus in the same way that deficit spending during World War II did (he's reacting to a Paul Krugman column based on that premise). Hanson provides lots of macro-level historical detail, but the fundamental premise is that the deficit spending of World War II was paired with some fundamental changes in how the money was spent...

The war years were characterized by frenetic hyperactivity: Americans worked long hours, women were brought into the work force, new towns and manufacturing centers sprang up, and people gave up necessities — all on the assurance that this furious pace and consumer scarcity would be short-lived.
...which differs in both purpose and implementation from current "stimulus" spending, where the primary objective seems to be preserving the status-quo established in the last decade, without any changes having to be experienced.

Comments

"Over the course of the war the federal government borrowed an amount equal to roughly twice the value of G.D.P. in 1940"

Not mentioned is that much of this borrowing was from the public, in the form of "War Bonds". Most of the public could be reliably depended on to spend this money when repaid. Perhaps, as many did, they would save it for retirement. Not a bad thing either.

I think any comaprison with the war years and now, fails at almost every turn. There was a spirit of patriotism, we were bent on delivering the world from evil, every family, or group, lost someone. Windows in every town had Gold Stars. There were no consumer goods, so saving was enforced. Wages were high, with plentiful overtime. Money accumulated.
There is no such spirit in the land today.

Government, being government, the "CCC" sought a budget increase in 1943; a time of very "full employment". The "CCC" was a 30's "stimulus program" that just wouldn't go away.

Posted by: Warrington Faust at September 6, 2010 10:10 PM

"... without any changes having to be experienced."

... wait, how can that be? This president campaigned on hope and the c-word.

Yesterday, for the first time, I heard the president reference a "New Foundation", his domestic agenda for the US going forward. One aspect of it is frugality.

What's unclear is how the new foundation is going to be built when so much of the original foundation - massive debt, health care "reform" - remains in place.

Posted by: Monique at September 7, 2010 8:02 AM

I've been arguing Keynesian stimulus with my friends for a while now.

The idea that the government should 'take up the job' of spending when consumers sharply tighten their purse-strings in order to 'soften the blow' of a correction does have merit, in my opinion. The problem that I see is that the average person today isn't 'saving' their money as much as they are paying off accumulated debt. Basically, consumers -and- the government already spent the last decade 'deficit spending' to boot the economy, and now servicing the debt is a huge drag on both parties. I wish that George W. Bush had urged the people to 'put away your credit cards and stop flipping houses' after 9/11 instead of encouraging us to max-out our debt instruments. If the government and consumers had been properly saving over the last fifteen years instead of running on borrowed money, we'd be able to 'stimulate' through a much smaller crash, and people wouldn't have been losing homes and depending on government checks through the recession.

My last two jobs have been at endowed institutions. I've seen how playing from 'wealth' rather than 'debt' leads to much more sane and rational approach to the management of money and employment. If you have accumulated wealth, you can afford to undertake capital projects that can lower your overall costs when times are bad. When you have to finance through debt, the picture becomes much uglier. An example is home improvements:

During flush times, it didn't make sense to spend $5,000 to replace my windows, since the money was put to better use in investments. I gladly accepted the status-quo of higher energy bills. After the crash, I decided that the value of lowering the monthly bills was well-worth the investment. Since I was able to pay from cash-on-hand, the end result is lower operating costs for my household that will lead to recouping the investment. If I had to finance the project, the cost of servicing the debt would have made the whole thing a wash and therefore not worth my time.

Posted by: mangeek at September 7, 2010 9:02 AM

Stimulus after stimulus.
Bailout after bailout.
Giveaway after giveaway.
Failure after failure for the Party Of No Jobs.
"Recovery Summer" ---the Republicans have "recovered" to heights in the Gallup poll not seen since the 40's.
Thanks progressives!

Posted by: Tommy Cranston at September 7, 2010 9:04 AM