Should goverment spend or slash?


A variety of factors in the last two weeks have restarted a very old argument about what governments should do to promote economic growth during bad times: spend more money, or slash its budget.  As we move into an election cycle for local, state and federal government, these debates will become louder, and more urgent, as both perspectives worry about a future where we collectively walk off an economic cliff.  Who wins and who loses is up to you – and the outcomes of our choices could be as stark as whether we start seeing bread lines or keep seeing Apple iPhone lines in our future.  Here are their arguments.

We need to spend like there’s no tomorrow.

Right before World War II, the United States found itself deeply mired in the Great Depression.  This depression had several causes, but most economists agree that the solution was massive government spending on WWII – tanks, guns, uniforms, parachutes, boots, jeeps… you name it, we built it, and we built it in massive quantities.  And we did this because the government spent unheard of amounts of money.  Similarly, after WWII, most of Europe and Japan lay in smoking ruins, with millions of its citizens killed or severely wounded, and an economy dramatically disfigured.  It was through the Marshal Plan and its unheard-of amount of spending on a fallen adversary that the economies of Europe and Japan rebounded, giving rise to the economic landscape that we are familiar with today.

We are not in the Great Depression today, though some think that we are in something that comes pretty close, or at least the beginning of something that could be worse.  The economy may not be moving as fast as the Obama administration may like, but, they would argue, its doing much, much better than it would have been without “The Stimulus,” aka, the American Recovery and Reinvestment Act of 2008.  What we need, they contend, is another stimulus, and probably another and another, until the engine catches and the economy takes off.  Though this camp has experienced significant legislative victory in The Stimulus, and several extensions to federal unemployment benefits, they’ve taken a beating recently, and have been unable to extend those benefits beyond their expiration this past weekend, let alone another stimulus package.

We need to run, run, run to the hills of fiscal sanity.

Our government is not a household checking account.  However, it is a lot like a really big company, with employees, bills to pay, and a fairly modest growth outlook.  Companies can definitely be in the red for a while and still keep the lights on, and get work done.  Eventually, smart companies can turn things around and get back in black.  To do this, you need to cut the projects that are bleeding money, invest in the things that are, and improve your balance sheet, so that your company doesn’t look like it’s run by idiots.

Because, it turns out that a company ill-run as such can have two bad things happen to it:

1) It can’t keep up with its debt payments (aka, it’s corporate VISA card) and it goes bankrupt; Or,

2) It owes so much of its debt to someone else, that in an effort to stay away from option #1, it is beholden to outside forces (aka, the US has to be nice to China, since China owns several trillion dollars worth of US debt, and could stop giving us a break on the payments, which would lead to #1)

…Now, it turns out that national governments can’t go into bankruptcy, technically, as we could just print more paper and magically have more money than we know what to do with.  But that would lead to hyper-inflation, and we would run into issues that usually confine themselves to Russia, or parts of the developing world.

So what are we to do?

As our elected officials move into full-time election mode during the August recess, the economy will be front-and-center.  Which camp gets elected will depend on what you think, and what you value more – stimulating the economy and keeping unemployment benefits in place, or guarding against the evils of a poorly run government mega-business.  What do you think?