This is a better argument against deficit finance. One counter-argument is that the future is so uncertain that the negatives which might happen, also might not, for many reasons. But the major counter is based on a philosophical/political preference rather than any economic analysis--a preference for immediate melioration of current severe economic and human problems, over worrying about an uncertain future. That is my own preference, but it is not necessarily shared by a majority of Americans.
3. The problems are global, policymaking is national. This is the major reason why the ideal solution will not work, even if it should. Even during the Great Depression, it was almost impossible to "protect" a national economy ("almost" because Hitler did it, but his means are not recommended), and attempts to do so had the major effect of spreading the pain without decreasing it. Now, the unstoppable international movement of information, capital funds, and even labor makes such insulation much more difficult.
The result is that the impact of a unilateral U.S. attempt at revival by deficit financing may be dissipated abroad. The 2009-2010 Obama administration stimulus package had a crucial effect in stopping the accelerating downturn in the U.S., but, as reported by Reuters in July 2010, " Economic growth slowed in the second quarter as companies invested heavily in equipment from abroad and the pace of consumer spending eased, raising concerns about the recovery in the rest of 2010."
The problem is that major competitors, notably the European Union, have been following (albeit sometimes reluctantly) the leadership of Germany, which is trying to revive itself by exporting rather than encouraging its own consumers. This is done by constricting while the U.S. stimulates. Japan similarly depends on exports rather than its own people. Interestingly, China, potentially the most dangerous competitor, is trying hard to increase domestic consumption, although also continuing to protect its exports by manipulating its currency.
The three objections are real: substitution is at least a potential threat; the short/long-run dilemma cannot be overcome by economic policy; the global problem exists. And these three realities are exacerbated by three factors that might possibly be change, but not in time: ideology and false analogy which together with the fundamentals have joined together and will continue to do so, producing a political blockage unlikely to be overcome:
4. A Puritan ideology that it is dangerous and immoral to "spend beyond one's means". This is strong in the United States; it is even stronger in Germany, still haunted by the hyperinflation of the early 1920s (suffered under completely different circumstances), which many Germans believe brought Hitler to power.
5. Closely related is the analogy that since a family cannot long spend what it doesn't have; neither can a government. But a family cannot print money; a strong government overseeing a fundamentally strong economy can. The U.S. today bears no resemblance to a defeated, reparations-burdened, Weimar Germany (nor does Germany today).
Which leads to the politics of the last two years which brought about the Republican victory, and the politics of the next two years that may lock it in--and lock in with it, economic disaster.
6. The ideological factors plus the constitutional structure of the United States, enhanced by archaic rules, have empowered a blocking minority to prevent the necessary continuing stimulus. That will now get worse. The Republicans in Congress, motivated by ideological and real economic beliefs shared by most Republicans, and a drive to win by making the Obama administration look bad, shared by all, have blocked the needed stimulus program. And it has clearly worked, politically. The administration failed to turn the job situation around. (The non-partisan Congressional Budget Office has pointed out that Obama stimulus did stop the downturn from becoming much worse, but that is theory. Political perception inevitably compares what is to what was, not to what might have been.). As a result of the failed turnaround, the Republicans now share control. Whatever minor compromises are made in the next two years will not be in the needed direction.
My advice to the Obama administration would be to make job creation through stimulus an issue nationally; and internationally too, using threatened protectionist sticks as well as reasoned arguments. This would at least draw the lines clearly when the 2012 election takes place under miserable economic conditions. The opposite--and likely--course, trivial compromise in an atmosphere of harsh partisanship, will have no favorable economic effect and lead to no political solution.
But the needed solution--continuing global stimulus--is really and completely out of reach. So what happens next? Three possibilities:
• A deus ex machina, or outside, at least, of any of the competing macroeconomic models discussed here. The Austrian-American economist Joseph Schumpeter contended that economic growth come in waves, stemming less from economic factors as such than by entrepreneurs exploiting new technologies, broadly interpreted. This started with the Industrial Revolution; the latest wave has been the Information Technology Revolution; when the next one will arrive, or from where, is not predictable, at least not by an economist. Perhaps from China.
• Years of what the American Keynesian economist, Alvin Hansen called, as the Great Depression wore on, "secular stagnation"--continuing grinding slow growth and high unemployment.
• The solution that ended the Great Depression--World War.
The first of these is not predictable. The other two are not desirable. Welcome to the third millennium.