No.
Increased spending isn’t an elixir for economic troubles.
The Great Recession and subsequent Not-So-Great Recovery have generated renewed interest in government policies intended to stimulate economy activity. These policies take on a variety of forms, but most emphasize increased levels of government spending as proposed by British economist John Maynard Keynes in the 1930s.
Advocates of these policies hope such expenditures have multiplier effects on the economy, in which a $1 increase in government purchases has a greater than $1 impact on the overall economy. Theory and empirical evidence suggest these multipliers are significantly smaller than advertised. Recent experience offers additional confirmation of the weakness of this approach, as nearly 14 million Americans are unemployed and economic growth has stalled.
While it is true that government could employ workers digging ditches and building bridges to nowhere, these jobs generally do not promote sustainable economic growth, and usually come at great cost relative to the value provided. Government tends to be a poor allocator of capital and an inefficient operator.
When evaluating these proposals, one must recognize that resources employed by government necessarily come from the private sector. For government to spend more, it must either borrow money or take money from the private sector via taxation. Higher tax rates reduce incentives for work and investment, weakening economic activity. Even with today’s low interest rates, borrowing may retard economic activity as businesses and individuals expect higher future tax rates will be necessary to repay the debt.
The United States is suffering partly from structural unemployment caused by the severity of the housing bust and the beginning of a protracted period of deleveraging, following nearly three decades of declining savings. The metro Atlanta economy has been particularly hard hit by these forces, with a large number of foreclosures, bank failures and an overhang resulting from excessive building in residential and commercial real estate. Only time will heal these wounds. While infrastructure projects financed by the federal government could potentially benefit the metro area, those benefits would be narrowly focused and slow to materialize. Moreover, given the tendency of such projects to experience enormous costs beyond budgeted estimates, states and municipalities must be wary of the budgetary impact of any cost-sharing implications associated with this federal free lunch.
Having just attempted a great Keynesian experiment that is now widely viewed as a failure, another half-hearted effort is especially misguided at this stage when confidence in the efficacy of such plans is so low.
What the U.S. economy needs today is not Keynesian policy but Keynesian animal spirits — the psychological forces driving individuals’ willingness to embrace risk. Unfortunately, animal spirits today are in hibernation, largely because the private sector lacks confidence and trust in government. Clarity and assurance that government will institute policies that promote growth, reduce regulatory burdens, and rein in entitlement programs is desperately needed.
Dorsey D. Farr is a partner at French Wolf & Farr, an Atlanta-based investment advisory firm.
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