In the 1920s, when the Soviet government was confiscating hidden gold, foreign currency and jewelry from previously wealthy citizens, a joke was making the rounds.
An old Jewish businessman gets hauled to the political police headquarters.
“We know you’ve got hidden valuables,” they tell him. “You’ve got to give them to us.”
“What on earth for?”
“Well, you know that we’re building communism, which will be the greatest political system in the world. In order to build it, our government needs money.”
“You know,” said the man, “an old rabbi in my shtetl (village) used to say: ‘If you don’t have money, you don’t start building.’”
President Barack Obama is going to start building. Even before he was inaugurated, his transition team came up with a fiscal stimulus plan, which will cut taxes for the middle class and retirees but also build and repair large chunks of U.S. infrastructure: roads, bridges and the transportation system. To be sure, Obama had been planning to invest in our creaking plant and equipment even before the economic crisis worsened during the final stages of the election campaign last year, but now, under the guise of rescuing the U.S. economy, his administration’s spending package will be both larger and easier to get through Congress.
As is well known, the Federal government has no money. The Bush Administration has bequeathed to its successor over $10 trillion in government debt as well as a budget deficit measuring $1.2 trillion this year. Nevertheless, the Obama Administration is planning to go even deeper into hock and borrow at least an extra $800 billion.
Aside from the odd member of the Republican Party which, having brought the nation to the brink of fiscal catastrophe, has suddenly remembered that it is the party of fiscal responsibility, there are few objections to the principle of using deficit spending as a means of stimulating the economy. Quite the contrary. Princeton economist Paul Krugman used his column in The New York Times, which helped get him the Nobel Prize last year, to warn that the Obama stimulus package was nowhere near enough. He advocates a government spending package at least 2.5 times higher, or $2 trillion.
The question is whether the Obama stimulus will create enough jobs to make up for the 2.6 million jobs lost in the course of 2008, revive bank lending and consumer borrowing and turn the economy around. The answer, paradoxically, depends on a previously obscure academic controversy about the course of the Great Depression.
For four decades after World War II, the mechanism by which the U.S. economy came out of the Depression was very clear. Franklin Roosevelt established his famed Works Progress Administration and began pouring public cash into massive public projects on an enormous scale exemplified by the Tennessee Valley Authority. These projects put millions of jobless Americans back to work, the economy started moving and eventually the Depression was overcome.
That “eventually,” however, didn’t satisfy everyone. Already in the 1970s and 1980s some economists began to point out that while in the early years Roosevelt’s New Deal did indeed spur economic growth, the effect was short-lived and by the second half of the 1930s the economy began sliding again. President Roosevelt, who previously had been cautious about John Maynard Keynes’ recommendations advocating deficit spending, began borrowing heavily during his second term. Yet, the Depression wasn’t fully defeated and the recovery didn’t come about until World War II, when the economy was shifted to a war footing, millions of men were drafted into the Armed Forces and the budget deficit reached 30 percent of GDP.
Government projects, it seems, are able to stimulate the economy, and even produce some corollary economic activity, but only as long as they last. Once the public money runs out and the projects stop, so does their effect on the economy. Only the private sector has the ability to grow continuously and generate output year after year by producing profits and investing a portion of those profits into on-going business.