When Richard Nixon lost the 1960 presidential race to John F. Kennedy, he blamed his loss on a strategic mishandling of economic policy during a recession. Eager to avoid repeating his mistake the next time around, Nixon changed his economic perspective and declared that we are all Keynesians now during his 1971 reelection campaign.
The economic theories of British economist John Maynard Keynes usually rise in popularity during times of economic hardship. He argued that recessions could be curtailed by increasing government spending and decreasing taxation to stimulate demand. Though Nixon’s words ring clear and America may be a land of Keynesians now, it cannot afford to be much longer. Keynes’ promise of a short-term solution to recessions comes at the heavy cost of future debt.
The virtues of President Obama’s recovery plan are debatable, yet no informed debates took place on the floors of Congress. This lack of scrutiny likely aided lawmakers in allocating large portions of the $787 billion based on political, not economic, efficacy.
Obama insisted there would not be a single pet project … [or] a single earmark” in the stimulus bill yet somehow $8 billion is dedicated to building a high-speed rail line between Los Angeles and Las Vegas which happens to be the Senate majority leader Harry Reid’s home district. Other initiatives include $2 billion for a clean-coal plant in Mattoon Ill. and $255 million for a polar icebreaker and other Coast Guard procurements according to the Feb. 17 CNN article “Stimulus bill a sorry spectacle.”
Even provisions that are arguably more economically effective – tax rebates and investment in vital infrastructure – may do little to stimulate the economy at this point because of the timeframe.
Under Keynesian theory the time for demand stimulation is now. But only a third of the stimulus bill’s spending will take place within this year. The remaining two-thirds will not occur until after 2010. Stimulus or no stimulus the economy should already be on the road to recovery by 2010 according to a Congressional Budget Office study published Jan. 27 2009.Political and timeframe issues undermine the effectiveness of the stimulus bill but the deeper danger lies in the unavoidable consequences of spending $787 billion. The Congressional Budget Office expects the U.S. budget deficit to grow to $1.2 trillion in 2009.
Obama himself acknowledged the need to counter current spending sprees with future fiscal reform. Regrettably decreasing government spending is difficult in any circumstance and will be nearly impossible in a world where two-thirds of federal spending is mandatory. Ballooning Social Security and Medicare obligations as well as interest payments on the ever-increasing federal debt will leave policymakers with few options. A Feb. 2009 study by the Brookings Institution predicts trillion-dollar deficits for many years to come even assuming an end to stimulus-level spending within two years and a quickly rebounding economy.
While the current recession is a central issue the future health of the economy is too often ignored. Silence on this topic allows the federal deficit to reach dangerous heights. Deficit spending puts the security of the United States government and economy in the hands of domestic and foreign investors which becomes problematic when deficit levels become so high that investors no longer view treasury bonds as a safe investment.
The resulting inability to obtain adequate funding would lead to a dramatic fiscal crisis. The government would be forced to either print money – and create dangerous hyperinflation in the process – or cause an unprecedented economic crash by radical spending cuts and higher taxes.
Keynes’ promise of a solution to recessions is appealing for a strictly short-term paradigm. Unfortunately deficit spending puts the United States at risk of far greater economic devastation. Politicians would do well to consider the ramifications of their actions when making major policy decisions such as how to spend $787 billion in taxpayer money in the future.