Failure by Design: The Story behind America's Broken Economy

Author:Bivens, Josh & Lawrence Mishel [Bivens, Josh]
Language: eng
Format: epub
ISBN: 9780801461132
Publisher: Cornell University Press
Published: 2011-01-11T05:00:00+00:00

Fiscal policy

Perhaps the most puzzling reticence among policy makers today is their failure to use further fiscal policy measures (i.e., something like another Recovery Act) to target a lower rate of unemployment. Given the successes of the Recovery Act (documented previously) and given that many of the potential downsides of fiscal expansion have clearly not materialized, politics alone seems to be in the way of using fiscal policy to spur economic activity.

The most-cited economic downside of larger federal budget deficits is the fear that, as the government competes with private borrowers for savings, interest rates will spike and private-sector investment will be “crowded out.” However, this argument does not hold for an economy where households and private business are trying to vastly increase their savings, not take on more debt. In this case, there is no competition for scarce savings, and there is no upward pressure on interest rates. This means that there is no danger that private investment will be crowded out. Indeed, because the biggest determinant of firms’ investment decisions is their assessment of sales growth, the Recovery Act, by supporting household purchasing power and salvaging potential customers for businesses, has surely crowded in business investment that otherwise would have sagged even more.

The evidence firmly supports this sanguine view of interest rates—rates on 30-year bonds are far lower than before the recession began and have actually fallen since the passage of the Recovery Act. Clearly there are very few competitors to the federal government in looking to increase debt, hence interest rate pressure is non-existent.

Yet fear (even hysteria) of larger deficits is constantly presented as the trump card against those arguing for more fiscal support for the economy. Given that there’s no economic merit to this argument, and given that fears of deficits have done little to derail proposals to lessen tax rates on the affluent, its durability seems rooted in the odd Beltway ideology that simply objects to using public spending to ease Americans’ economic worries.

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