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Liberals’ Strange Retreat on Government Spending

In the 1930s, as the world plunged into depression, there were two political factions that insisted nothing could be done: Marxists, who saw the depression as the death knell of capitalism, and laissez-faire economists, who believed that the only way to revive the economy was to let the depression takes its course like a bad storm at sea. Imagine my surprise in the wake of Thursday’s stock market crash to find a similar attitude toward the current downturn among liberals and mainstream economic thinkers. 

In a column in The Washington Post, Ezra Klein said the “right question” to ask about the economy was, “Where will the recovery come from?” He responded that “no one has an answer,” but also asserted that the recovery “won’t come from the United States.” Financial Times columnist Gillian Tett said pretty much the same thing on PBS’s News Hour. “They’re out of ammo,” Tett said of the federal government. “I mean, they have already used all the fiscal measures they could in the last two or three years. And they’re pretty much back to where they can go, as far as they can go in terms of the monetary policy measures.”

I got news for Klein and Tett (which sounds like a law firm). If a real recovery occurs in the next four or five years, it will come about the same way a recovery took place after the 1930s: from a huge infusion of government spending. It won’t, one hopes, require the justification of war, but it will have to consist in the fiscal equivalent of war. If we don’t do that, we may not escape this slump for the rest of the decade—and neither will Great Britain and other countries that have also convinced themselves that reducing government is the best course of action. 

THE ECONOMICS ARE familiar by now, but under attack from the right and insufficiently understood in the center, including at one of our woe-befallen, politically compromised rating agencies. There are two types of recessions: the short-term, cyclical wage-price recessions that prevailed after World War Two and that were manipulated by monetary policy, and the deeper recessions, or depressions, like those that occurred in the 1890s or 1930s. What is happening today is more similar to past depressions. It was brought about by a financial crash, which creates a backlog of private debt, coming on top of a slowdown in industrial production caused by global overcapacity. The result has been a paralyzed private sector.  

There are three kinds of measures that are needed to “solve” this kind of recession: first, short-term measures that revive consumer and investment demand; second, measures that will stimulate new domestic outlets for private investment; and third, steps that prevent the demand government creates from being siphoned off primarily in imports. For the first purpose, the best kind of measures are those that create jobs for the unemployed—whether in the public or the private sector—and that eliminate or reduce debt directly, for instance in housing or school loans. Tax cuts are not as effective because, given the level of private debt, consumers are likely to save rather than spend them. With interest rates already near zero, Federal Reserve monetary measures are also not very effective.

There is a copious amount of historical evidence that cutting spending—and cutting government jobs—is more likely to deepen a downturn. Start with the United States, Germany, and Great Britain in the first years of the Great Depression; the United States in 1937; and Japan in 1997. In each of these cases, cutting spending made things worse. To be sure, large deficits can harm an economy; but not when capacity is idle, unemployment is high, interest rates are not rising, inflation is non-existent, and a government’s currency and Treasury bills are still widely in demand.

Why, then, do policy-makers and pundits think otherwise? Some economists and conservative politicians have swallowed the laissez-faire Kool-Aid, and simply don’t get it. In some quarters, rampant confusion prevails. But with a liberal like Klein, I suspect that despair—what Kierkegaard called “the sickness unto death”—over getting Congress to agree to a dramatic boost in government spending is really behind his thinking there is no economic solution. However, following the lead of my colleague Jon Chait, I would distinguish between what needs to be done economically, and what can be done politically. What needs to be done is fairly clear; what can be done is not. But I think the political effort is worth making.

The first consideration has to do with the sheer gravity of the situation. What is at stake goes beyond an abstract rate of unemployment, or the prospect of a Republican White House in 2012, or even the misery of the long-term unemployed. From the beginning, this recession has been global. Germany has to take leadership in Europe, but the United States is still the world’s largest economy, the principal source of consumer and investment demand, and the banking capital of the world. If the United States fails to revive its economy, and to lead in the restructuring of the international economy, then it’s unlikely that other economies in the West will pull themselves out of the slump.

And as the experience of the 1930s testified, a prolonged global downturn can have profound political and geopolitical repercussions. In the U.S. and Europe, the downturn has already inspired unsavory, right-wing populist movements. It could also bring about trade wars and intense competition over natural resources, and the eventual breakdown of important institutions like European Union and the World Trade Organization. Even a shooting war is possible. So while the Obama administration would face a severe challenge in trying to win support for a boost in government spending, failing to do so would be far more serious than the ruckus that Tea Party and Republican opposition could create over the next year.

The second consideration has to do with public opinion. In the United States, skepticism about government is the default position. But it coincides with support for specific initiatives and is put aside during crises when it appears that private initiative is insufficient. That happened during the world wars, the mid-1930s, and in the months following the financial crash in September 2008. The Obama administration won support for its stimulus program by convincing the public that the economy was in critical condition, but since then it has backed off and argued instead that a recovery was in place. In August 2010, Treasury Secretary Tim Geithner published an infamous op-ed in The New York Times entitled, “Welcome to the Recovery.” Even as it has become clear that a recovery is not taking place, the administration has continued to insist that it is—only more slowly than expected. That’s understandable—saying that the recovery has not occurred is tantamount to admitting failure—but it also undercuts any attempt to win over the public to ambitious government initiatives.

Could the public be won over? During the first stage of the debate over raising the debt ceiling, administration officials privately expressed doubt about whether they could ever convince the public that the debt ceiling needed to be raised. Instead, they focused on getting Wall Street to pressure the Republicans. But even without an administration effort to sway the public, support for raising the debt ceiling doubled during July, as the public became aware of the consequences of not raising the limit. Could a noisy administration campaign—led by the president and based on the idea that there is a national and global crisis that requires extraordinary measures—win support for a new stimulus program? Perhaps not, but given the gravity of the situation, it should at least be attempted.

Of course, winning over public opinion does not necessarily lead to winning over Congress. But, again, it is not inconceivable. In the spring of 2010, the administration was able to budge Republican opposition on financial reform by waging a public campaign. And if the administration doesn’t finally succeed in winning over an intransigent Republican party to a program designed to create a recovery, it will have drawn the kind of sharp contrast that the public will be able to understand in the event that the Republicans do win, and continue on their current path of cutting spending.

Other administrations have sharply pivoted when their policies haven’t succeeded: Franklin Roosevelt changed course in 1938 after his budget cutting created a double-dip recession; Richard Nixon became a born-again Keynesian in 1971. But I fear that, under its veneer of optimism, this administration, like some of its supporters in the commentariat, has given up on trying to change public opinion, and, by extension, on pulling America and the world out of the Great Recession. It’s not a matter of theory with them—they haven’t become radical Marxists or followers of Friedrich Hayek—but of political despair. 

John B. Judis is a senior editor of The New Republic and a Visiting Scholar at the Carnegie Endowment for International Peace.