Some Economics

With the US and World economy not yet recovered, what can the Government do to prevent a double-dip recession? First, the Government should not pull back, they should not raise taxes, and they should not cut spending. Those things can be accomplished, and should be accomplished, when the economy is thriving and the unemployment rate is under or around 7%. Although our Government’s deficit is an issue; it is an issue that can be handled in a year or two. If our Government were to react to our deficit woes now, our economy will surely turn into a Japanese-style deflationary trap– low growth, high unemployment. The Government is the only one with the ability to spur demand.

So what should the Government do? Spend, spend, and spend. Paul Krugman explains why:

But if we need to raise taxes and cut spending eventually, shouldn’t we start now? No, we shouldn’t.

Penny-pinching at a time like this isn’t just cruel; it endangers the nation’s future. And it doesn’t even do much to reduce our future debt burden, because stinting on spending now threatens the economic recovery, and with it the hope for rising revenues

Right now, we have a severely depressed economy — and that depressed economy is inflicting long-run damage. Every year that goes by with extremely high unemployment increases the chance that many of the long-term unemployed will never come back to the work force, and become a permanent underclass. Every year that there are five times as many people seeking work as there are job openings means that hundreds of thousands of Americans graduating from school are denied the chance to get started on their working lives. And with each passing month we drift closer to a Japanese-style deflationary trap.

Following Krugman’s advice, Mark Zandi (chief economist of Moody’s Analytics), writes:

State and local officials are pleading for financial help, and Congress should respond quickly and positively.

Without more aid, states and cities will have no choice but to raise taxes and slash jobs and services, which could cut short the still-fragile economic recovery and trigger renewed recession. Governments would have no effective way of responding at that point, making the downturn long and painful.

State and local governments are struggling with epic shortfalls. The states’ aggregate deficit for fiscal 2011, which begins shortly for most of them, is close to $100 billion. Fiscal difficulties in California, Illinois, and New York are getting the most attention, but similar problems plague states and municipalities from coast to coast.

Even if Congress fails to come to the states’ rescue, the economy probably will not fall back into recession, but the odds of a “double-dip” downturn are nevertheless too high. Until the economy is off and running, federal policymakers shouldn’t risk stopping it by failing to help state and local governments get through the next fiscal year.

There are reasonable concerns that providing that help will add to Washington’s own fiscal problems. Those must be addressed before global investors begin to balk at buying U.S. debt, as they are now doing in the case of some European countries. Indeed, it would be ideal if Congress funded additional aid to the states by reducing other spending or raising taxes, rather than through more borrowing.

But concerns about the federal budget should be addressed when the economy is in full swing. A larger federal deficit this year is not an economic problem, provided we make up for it with greater discipline in subsequent years.

Paying as we go should not be a precondition for additional aid to the states now. Shoring up state budgets will help ensure that economic growth continues and ultimately gains traction – which is a precondition for addressing our long-term fiscal challenges.

Congress must enact another stimulus package, and they must enact it now, with majority of the money going to the states–allowing them to use the money as needed, since they know what their state needs.

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Published in: on June 27, 2010 at 5:05 pm  Leave a Comment  
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