New Deal remedies for Great Depressions:
Larry Summers on government spending and the US economic crisis
By Jon Fernquest |
In Aesop's fable of the ant and the grasshopper, the grasshopper spends the warm months wasting away his resources while the ant works hard to store up food for the winter.
When winter comes, the grasshopper finds himself dying of hunger.
When the grasshopper asks the ant for food, the ant replies that he should have thought more about saving during the good times.
Likewise, it makes sense for a government to spend less and run a surplus during good economic times so that it can spend more during bad economic times.
Unfortunately, the US government has been running large government deficits during good times recently. The bailout will likely add to this large government deficit. Even so, "the expected cost of the bailout is far less than $700 billion" so there is still room for government spending (fiscal policy) to help people during the bad economic times ahead, according to former Treasury Secretary Larry Summers in his Financial Times commentary this weekend.
The Great Depression has been a popular topic floating around the blogosphere during the last few days (Listen to interviews with survivors and read UC Berkeley economist Barry Eichengreen's comparison with Brad De Long's response)
The New Deal expanded the role of government in the US economy and created jobs and employment greatly lessening the impact of the Great Depression. There might just be another New Deal on America's horizon depending on who gets elected in the upcoming US presidential elections.
Here is a shortened form of the Larry Summers Commentary:
Commentary, Financial Times
Taxpayers can still benefit from a bail-out
by Lawrence SummersCongressional negotiators have now completed action on a $700bn authorisation for the bail-out of the financial sector. This step was as necessary as the need for it was regrettable. ...
The idea seems to have taken hold in recent days that because of the ... bail out..., the nation will have to scale back its aspirations in other areas such as healthcare, energy, education and tax relief. ...[T]he events of the last weeks suggest that for the near term, government should do more, not less.
Bailout impact on government deficit
First,.... No one is contemplating that the $700bn will simply be given away. All of its proposed uses involve either purchasing assets, buying equity in financial institutions or making loans that earn interest. ... It is impossible to predict the ultimate cost to the Treasury of the bail-out... But it is very unlikely to approach $700bn and will be spread over a number of years.
Second, the usual concern about government budget deficits is that ... government bonds ... will crowd out other, more productive, investments or force greater dependence on foreign suppliers of capital. To the extent that the government purchases assets such as mortgage-backed securities with increased issuance of government debt, there is no such effect.
Third, since Keynes we have recognised that it is appropriate to allow government deficits to rise as the economy turns down if there is also a commitment to reduce deficits in good times. ...[T]he US made a serious error in allowing deficits to rise over the last eight years. But it would be compounding this error to override ... "automatic stabilisers" by seeking to reduce deficits in the near term.
Fiscal activism to fight likely high unemployment
Indeed, in the current circumstances the case for fiscal stimulus ... is stronger than at any time in my professional lifetime. Unemployment is now almost certain to increase – probably to the highest levels observed in a generation. Monetary policy has very little scope to stimulate the economy... And ... economic downturns caused by financial distress ... ... are almost always of long duration. ...
The more people who are unemployed the more desirable it is that government ... put them back to work by investing in infrastructure, energy or simply through tax cuts that allow families to avoid cutting back on their spending.
Fourth, it must be emphasised that nothing in the short-run case for fiscal stimulus vitiates the argument that action is necessary to ensure the US is financially viable in the long run. We still must address issues of entitlements and fiscal sustainability.
From this perspective the ... best measures would be those that represent short-run investments that ... over time ... improve the budget. Examples would include investments in healthcare restructuring or steps to enable states and localities to accelerate, or at least not slow down, their investments.
A time when confidence is lagging in the household, financial and business sectors is not a time for government to step back. ...
(Source: Economist's View Blog (28-09-08) quoting from Financial Times (28-09-08))
Vocabulary:
Larry Summers - an American economist, Secretary of the Treasury for the last year and a half of the Clinton administration, President of Harvard University 2001-2006, for his work in macroeconomics was the 1993 recipient of the John Bates Clark Medal awarded to "that American economist under the age of forty who is adjudged to have made a significant contribution to economic thought and knowledge" (See Wikipedia)
government deficits, government budget deficits - when the government spends more than the money it receives from taxes and other sources
run a surplus - spend less than money received
the Great Depression - a decade of high unemployment, poverty, low profits, deflation and lost opportunities for economic growth and personal advancement in the United States that began with the Wall Street crash of 1929.
(The traditional explanation is a combination of high consumer and business debt, ill-regulated markets that permitted malfeasance by banks and investors, growing wealth inequality, and natural disasters such as the Dust Bowl and 1926 Miami hurricane creating a downward economic spiral of reduced spending and production) (See Wikipedia)
the New Deal - government programmess created between 1933 and 1938 by US President Franklin D. Roosevelt to create jobs for the unemployed, to reform business and financial practices, and for the recovery of the economy during The Great Depression (See Wikipedia)
fiscal spending - government spending
fiscal stimulus - increased economic activity and growth from government spending
fiscal sustainability - whether a pattern of government spending and taxation can be continued for a long time (over the long-run)
activism - working to bring about social or political change, vigorous and sometimes aggressive action in pursuing a political or social end
fiscal activism - using government spending to lessen the negative impact of economic downturns during the business cycle (Read article1 and article2)
remedies - medicines that cure a disease
crowd out - When the government expands its borrowing to finance a deficit from increased spending (or tax cuts). This increased borrowing leads to higher interest rates by creating a greater demand for money and loanable funds. Businesses in the private sector are sensitive to interest rates so they will likely reduce investment due to a lower rate of return. This is the investment that is crowded out (See Wikipedia)
the ant and the grasshopper - a story (fable) by Aesop on the virtuesof saving and thrift (See Wikipedia)
wasting away his resources - using up the resources he has instead of saving them
authorisation - official permission from authorities to do something
regrettable - is bad and should not happen
The idea seems to have taken hold that.... - more and more people are thinking..., public opinion has changed to...
scale back - reduce, make smaller and less ambitious
aspirations - goals you wish to achieve
scale back its aspirations - reduce the number of things you want to achieve, be less ambitious
contemplating - thinking about whether to take or not take some action
given away - given for free, with no cost to receiver
equity in Y - owning part of Y
equity in financial institutions - owning part of the financial institutions
mortgage-backed securities - securities created by combining several mortgage home loans together, one of the root causes of the current crisis (See Wikipedia)
a commitment to do Y - a promise to do Y
automatic stabilisers - government spending that automatically counters the business cycle and stabilizes GDP without government action
the case for Y - the reasons Y should be chosen
the case for fiscal stimulus - the reasons why fiscal stimulus is a good thing to do
financially viable - has enough money to continue existing as a business or organisation
entitlements, entitlement programmes - government programmes such as social security that give people money and benefits
