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The Best Antidote for the Deficit and the Economy: More Public Investment

Zach Carter has a nice list of strategies that would save money for the government’s bottom line without having to either raise taxes or reduce social insurance benefits. They all have a degree of positive benefits to them, from prison reform to ending the drug war (those two are related) to cracking down on offshore tax havens to letting Medicare negotiate on drug prices to cheaper monitoring of undocumented immigrants to looser monetary policy to even something as trivial as making $1 coins instead of paper bills. But his opening paragraph is actually the right answer here:

There’s an old axiom in the investment business that applies to the federal government, as well: You have to spend money to make money. Paradoxically, the U.S. fiscal position would likely be better off if the government simply spent more money. When the economy is booming, government spending can easily be wasteful. But when the economy is not meeting its capacity, the government needs to step in to give it a boost, according to several schools of economic thought. At a time when there are more than four job applicants for every job opening, the economy is clearly not meeting the demand for work, and the government can productively step in by spending money to hire people and get things back on track. By boosting long-term economic growth through short-term spending, the government could actually ease the deficit by ponying up money right now.

That’s a one-paragraph summary that should be memorized by everyone for future use in conversations with friends, neighbors and representatives in Congress. We need to stimulate a recovery, and with consumer spending at its limits, trade showing a negative balance and business investment lagging – mainly because of a lack of customers – government is the spender of last resort. Economists agree that the best program for the economy is a rejection of austerity and a focus on creating jobs, through public investment. That’s the ENTIRE POINT of the fiscal slope – too much austerity will sink the recovery. Implicit in that is the point that we must spend our way to recovery, and that this will improve not only the economic fortunes of the country, but the actual bottom line.

The budget hawks have the sequence backwards. Public outlay for jobs and recovery come first, growth is restored, and revenues follow. Budget cuts in a deep slump lead only to a deeper slump.

The government should invest in areas vital to our economy — to repair crumbling infrastructure, to build 21st-century smart-grid, public transportation and renewable energy systems, and to create public and private sector jobs. We should also help states prevent layoffs of teachers and other public servants, make early care and higher education more affordable, and create public service jobs throughout the nation. It can do so by borrowing at record low interest rates. We can also stimulate recovery without increasing deficits by increasing taxes on the wealthy and pumping the proceeds directly into the economy.

We don’t necessarily need to do that, but certainly higher taxes on the wealthy will do almost nothing to derail economic growth, and would reduce the overarching power of political economy besides.

In general, this approach is reflected in the White House’s opening bid, though you can question whether or not they go far enough. The point is that we have serious economic problems, today, not 10 or 20 or 40 years from now. We might as well try to fix them.

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David Dayen

David Dayen