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Mark Thoma sends us to Robert H. Frank on the desirability of more short-term government spending than we have:
How Cuts in State and Local Spending Endanger a Recovery: ENCOURAGING economic news has been reanimating the critics of President Obama’s stimulus program. But heeding their admonition to end the program would be a grave mistake. We need more stimulus now, not less.... Another quarter-million jobs were lost last month, and even the most optimistic economists predict that it will be many more months, if not years, before robust employment growth resumes. Now we face an ominous new threat to recovery from sharp cuts in state and local government spending.
The more than $15 billion excised from California’s budget last month was just a small fraction of recently announced cuts.... [M]ost recent state cuts have been for services widely viewed as essential... mandated by laws meant to stop politicians from spending beyond their means... [but] sharply reduced government spending is exactly what the economy doesn’t need right now.
Through its legal authority to run deficits to stabilize the economy, the federal government can keep recovery on track by transferring revenue to states and cities....
[O]pponents of the original economic stimulus... flaws in their arguments don’t rise to the absurd heights seen in recent town hall meetings on health care reform. But it is a difference in degree, not kind. Both proponents and opponents of the stimulus program agree that unemployment is high because aggregate spending levels are too low.... Proponents believe that sharply higher government spending will hasten the downturn’s end. Opponents say no....
Lee Ohanian of the University of California, Los Angeles, a stimulus opponent, explained why he believes that increased government spending wouldn’t help the situation. The problem, he says, is that “the higher taxes on incomes or expenditures that ultimately accompany higher spending depress economic activity.” Because the short-run stimulus program has been financed with borrowed money, not higher taxes, Mr. Ohanian must have in mind future taxes needed to pay off stimulus-related debt. His argument... thus boils down to this striking contention: As the government spends borrowed funds, consumers will start to realize that the resulting debt spells higher taxes in the future, which will lead them to curtail their current spending. Those cuts will offset increased government spending, leaving no net stimulus...
This is, as I say every day, simply wrong as a matter of very basic economic theory. Increased nominal government spending financed by future taxes is crowded out by a reduction in nominal private consumption spending if and ony if what the government spends money on is a perfect substitute for what private consumers spend money on. That just is not hte cse.
