What’s The Best ‘Spending Yourself Out Of Recession’ Argument?

BY Paul Solman  October 4, 2010 at 1:08 PM EST

Paul Solman answers questions from NewsHour viewers and web users on business and economic news every day on his Making Sense page. Here’s Monday’s query:

Making Sense
Question: You recently answered a question about why stimulus spending is the government’s responsibility. I know that there’s a lot of fear lately that such spending will drive up the deficit. I’m curious, then, about how you think the Obama administration and its financial gurus could better explain to the public the Keynesian argument for stimulus spending–since obviously that argument isn’t getting through. Without taking political sides, of course, what do you think is the best way to explain the “spend your way out of a recession” argument?

Paul Solman: Hmmm. Intriguing question. With the understanding that I’d decline to answer if this were the Obama administration asking, here’s a non-partisan stab at a response:

At work tomorrow morning, your boss, a friend from childhood, comes into your office crying. She has to lay off 10 percent of the company, she sobs. If not, the firm goes bankrupt. To be hyper-fair, she’s picked names out of a hat. Yours is among them.

Yes, you’re facing foreclosure. Yes, you can barely afford the medications that keep your disabled spouse from suicidal depression. But there can be no exceptions.

Why? you ask.

Our customers have cut back their spending, she sputters. Individuals who used to buy from us are saving more; corporate clients can’t get loans from banks, and are afraid to spend anyway, given THEIR uncertainty about the future.

You’re both in tears now.

So I’m doomed? you ask.

The only hope is for us to get a big federal contract and/or tax break, the boss says. But let’s face the current economic facts. Government spending would mean more government borrowing. More borrowing would scare the investors who lend America money (by buying U.S. bonds). They would then demand higher interest payments for their loans, which would cost the government even MORE money, putting it deeper in debt. Pretty soon, our bonds would be worth less — or worthless.

But wait a second! you say, your voice perhaps rising. Interest rates are at record LOWS — with our national debt at a record HIGH. Plus, if you lay off 10 percent of our company and everyone else does the same, there will be FEWER customers for our products and you’ll have to lay off even MORE employees. Don’t you see? It’s a downward spiral! And what’s the worst that can happen?

“What is?” asks your boss, her tear-sodden eyes beginning to see the light.

The U.S. dollar will lose value against other currencies. True, that will mean a lower standard of living for all of us. But the pain will be shared and it will be gradual. It will force Americans to finally live within our means. It will make our exports cheaper, and restore American jobs as we sell more to consumers abroad. And who gets hurt most? People who own U.S. bonds right now. Rich people. The Chinese.

Omigod! says your boss. I see your point. I’ll write my Congressperson. I’ll organize GREEN tea parties. I’ll march on the Mall. I’ll engage in civil disobedience. I’ll FORCE the government to spend.

This entry is cross-posted from the NewsHour’s Making Sen$e page, where business and economics correspondent Paul Solman answers your questions on economic news. Follow Paul on Twitter.