For at least five years, the economy has been mired in either a recession or quasi-recession that has resulted in high unemployment and slow growth.
Democrats generally believe that one of the best approaches to jump-start the economy is to adopt a Keynesian approach by temporarily increasing public sector spending. Conservatives insist though that a larger government economic role will produce inflation and higher interest rates and will crowd out private sector investment. With the exception of the military, they also claim that government spending is inefficient compared to the private sector.
Yet, although the national debt has grown by several trillion dollars in recent years, interest rates are at historic lows and inflation barely registers. Also, there is no evidence that higher public debt has caused economic growth to decline.
Rather, just the opposite is true.
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Although the national debt was 120 percent of GDP at the end of WWII the economy grew by seven fold over the intervening years. Meanwhile, although public debt fell as a percentage of GDP, the total public debt continued to grow.
At $15 trillion, public sector debt is currently about 100 percent of GDP. A much more serious issue is private sector debt which at $38 trillion is more than twice as high as public debt — much of which was caused by poor banking practices. However, until recently, private sector debt was close to $42 trillion — which means the private sector has been paying down debt rather than investing in the economy.
Hence, more public sector spending can be justified simply to fill the private sector spending void.
Republicans, in contrast, believe strong economic growth will only be brought about by reducing private sector regulations and taxes (which Keynes also indicated could be a reasonable strategy) which they contend will unleash a domestic job bonanza. However, over the past several decades it can easily be argued that rather than being job creators it has been the source of domestic job destruction. For instance, following liberalized trade policies, companies have exported millions of jobs to countries such as China and India where wage rates are a small fraction of those in United States, environmental regulations are either non-existent or unenforced and meaningful worker rights are a fantasy. Also, sophisticated technological innovations are rapidly replacing jobs.
Massive chip plants are capable of running with just a handful of people since the plants are almost entirely automated while 3D printing, referred to by industry insiders as the third industrial revolution, could eliminate the need for labor to produce a wide range of goods.
Hence, the argument that efficiency-improving innovations are by definition an economic good sometimes rings hollow. Although innovations oftentimes are positive, they cannot be permitted to dominate our economy to the point where good jobs are permanently relegated to the past.
So what are we supposed to do to at least partially rectify the malaise that has become the new economic paradigm?
President Barack Obama has a unique opportunity to take the initiative by offering Republicans an irresistible deal that reflects Keynesian ideals that would at least partially satisfy the ideological bent of both parties. In exchange for significantly lowering corporate and individual tax rates, the government would be given the wherewithal to inject $2 trillion into the economy as targeted stimulus.
This would directly and indirectly create millions of jobs via the multiplier effect and it would encourage the private sector to spend the hundreds of billions it currently holds in reserve. Although the national debt will initially grow larger, it will gradually decline due to additional tax revenues from businesses and from taxes received from individuals who currently receive unemployment compensation.
Over time, the economy will grow at a robust rate which will create even more employment. Furthermore, if a modicum of inflation occurs, it will reduce the real value of the debt and encourage further investment.
Although no approach is perfect, the potential solution outlined above holds far more promise and makes far more sense than sequestration which will cause the economy to contract and give rise to even more unemployment.
Reach Mark Phillips at email@example.com