When Economics and Democracy Don't Mix
The United States won't stand for a Japanese-style Lost Decade, James K. Galbraith, economist and historian, tells McClatchy Papers in a recent interview. You hear that, Nouriel Roubini? We won't stand for it!
Alright then, so what's Galbraith's proof? It's a little confusing.
These are sequential questions, interrupted only briefly so I can sum up his points in one sentence each.
Q: Are government stimulus and spending efforts really necessary?
A: "The world has lived with less credit before. It requires that you operate with a stronger, more expansionary fiscal policy. If we are right that we're not going to see the revival of a broad credit-based expansion, you can have economic activity, but it is going to be financed by the government. Any attempt to move toward a 'contractionary' fiscal policy, when you haven't got an expanding private credit system, is going to produce a return to recession very quickly."
Shorter: The stimulus is necessary, and any anti-stimulus policies will only bring back the recession.
Q: So you're not worried about the projected deficit of $1.58 trillion for the current fiscal year?
A: "It doesn't change anything about what has to be done. There is no way around this. If the private economy starts to recover, and you get private contributions . . . then the budget deficit will fall, and anything you are doing can be scaled back. There is nothing that stops government from doing too much and cutting back on it."
Shorter: Large deficits are so necessary they should not -- nay, cannot! --stop the government from cutting back on stimulus.
Q: Some economists fear a double dip back into recession next year and sluggish growth for years to come. Are we looking at a 'Lost Decade' similar to Japan in the 1990s?
A: "There's no way we're going to tolerate a Lost Decade in this country. It's a fantasy, because the House of Representatives has elections every two years. The country is not going to tolerate 10 percent unemployment indefinitely. People (in power in Washington) need to be aware of that. If they don't take the opportunities now . . . someone else will."
Shorter: Frequent elections will keep our politicians on good stimulus measures to recover the economy.
Do these points add up? I'm not sure that they do. Despite the $787 billion stimulus and the projected $1.58 trillion deficit, Americans are still sour on both the state of the economy and knocking-on-double-digits unemployment rate. If the economy still stinks in a year, and Americans register their displeasure toward Democrats at the polls in 2010 (or 2012), wouldn't that result in a Republican comeback with more anti-stimulus conservatives trying to block efforts to fiscally stimulate the economy? If Galbraith is so confident that Keynesian stimulus measures are necessary in the long run, deficits be damned, I'm not sure why he's so excited about the public's opportunity to vote down those measures in a year.