by Randolph T. Holhut
American Reporter Correspondent
December 1, 2008
NOW, THE ECONOMY; LATER, THE DEFICITS
DUMMERSTON, Vt. -- John Maynard Keynes' most famous contribution to the science of economics was his principle that, in a recession, government must take the lead in stimulating demand through increased spending - even if it means running up a deficit.
The British economist's theories were first applied during the Great Depression, with the massive public works spending programs during the 1930s initiated by President Franklin D. Roosevelt. When the Roosevelt Administration thought a recovery was underway and cut back on public works spending, the result was the 1937-38 recession. Budget balancing was again abandoned and government spending increased, but this time, to prepare for a looming global war. The economy quickly rebounded as a result.
"The Great Depression was a horrible and extremely painful experience. But we did learn something extremely valuable from this experience: how to get out of a depression," economist Dean Baker wrote recently. "The answer came in the form of the massive government stimulus associated with World War II. At the peak of the war, our deficits exceeded 20 percent of GDP. This would imply deficits of more than $3 trillion in today's economy. This is important. We know how to keep the economy from collapsing. We didn't have this information 80 years ago. The secret is to spend money, lots of it."
There is nothing wrong with deficit spending as long as you get something tangible as a result. The public works programs of Roosevelt's New Deal created the infrastructure we are still using today. The money that was spent during World War II was for a war of survival that was absolutely necessary. Investing in the GI Bill, the Interstate Highway System and other postwar programs helped create three decades of prosperity.
But the worst thing a government can do in a recession, as Roosevelt found out, is to not spend money and focus on balancing budgets. That's why retaining the social safety net and rebuilding public infrastructure should be a priority at all levels of government, and the Obama Administration seems likely to embrace increased spending as something that is more important right now than paying down the federal deficit.
Conservatives and budget hawks shouldn't get hung up on the idea that an increased role for government and increased government spending violates free-market principles. The simple truth is that there has never been a free market in America. Government has always intervened in the economy, and the wealthy and corporations have never had a problem with it. They only complain when government threatens to regulate their activities or pass on some of the nation's wealth to those in need.
Almost from the founding of the republic, the federal government has propped up failing financial institutions, lavished subsides on speculators and given away land and resources to encourage development. From the construction of the first transcontinental railroad in the 1860's to the savings and loan bailout in the 1980's, Democrats and Republicans alike have helped big business while giving the back of their hands to the poor. Perhaps the only time the cry of "socialism" was ignored was when Roosevelt pushed through the New Deal and put millions to work in the 1930s.
But after the events of the past couple of months, no longer can any politician say with a straight face that we can't afford universal health care, or increased spending on public works, or finding a way to help struggling homeowners pay off their mortgages. If the "big government" that conservatives fear can find hundreds of billions to fight a war of choice in Iraq or bail out the financiers, it can find money to spend for the public good. And in the current economic crisis, spending money for the public good is a necessity.
Conservatives also squawk about taxes and regulation, but in the years between the early 1940s and the early 1970s - when taxes were high and the financial markets were tightly regulated by the federal government - were some of the most prosperous this nation has ever seen.
Government spending played a role in that prosperity, because of the traditional role of government doing the tasks that the market cannot or will not do. The market will not produce a health care system that people can afford. It will not build bridges and roads. It will not educate our children or protect us from crime or give us clean air and water. These are jobs for government. There are investments in our society that benefit everyone. These are things that civilized societies do.
The every-man-for-themselves philosophy of conservatism rejects this idea, unless government is helping the rugged individualists in corporate America who reject spending for the common good but line up at Uncle Sam's door for a handout when they're in trouble.
Certainly, federal programs that aren't absolutely necessary can be pared back, but lawmakers have no need to cut indiscriminately. They do need, however, to weigh everything in the udget to see what will do the most good for the greatest number of people. They also need to do whatever is necessary, including spending money to create lots of jobs and stimulate demand, to get the economy moving. Once we get out of this downturn, we can go back to paying down deficits.
American Reporter Correspondent Randolph T. Holhut has been a journalist in New England for nearly 30 years. He edited "The George Seldes Reader" (Barricade Books). He can be reached at email@example.com.