What should government do?

Depression-era economics still pertinent today


This graph shows the predicted effects on the economy of current government intervention with the American Recovery and Reinvestment Plan. Source: President Barack Obama’s Council of Economic Advisors.


After the stock market crash in 1929, banks shut down, unemployment was at 25 percent and President Herbert Hoover led the United States with the idea that in the long run, the market would correct itself.

Across the Atlantic, a prominent British economist named John Maynard Keynes countered this idea with a famous quote: “In the long run, we are all dead.”

Keynes was a top world economist in the early 20th century who penned his most influential work, “The General Theory of Employment, Interest and Money,” in 1936. One of Keynes’s ideas that received the most attention was that government should use its power to create jobs and spur economic activity during a recession.

As for Hoover, the rest is history. The public was hungry for someone who would take an active role in the economy. The presidential election of 1932 brought Franklin Delano Roosevelt and his New Deal with America. However, there is still debate as to whether or not FDR’s New Deal really pulled America out of the Great Depression or if World War II manufacturing brought the economy back around.

As the new Obama administration assembles its team of economic advisors and passes its nearly $787 billion stimulus package to address today’s financial worries, the phrase “Keynesian economics” has been thrown around by pundits and politicians alike, begging the question: What should a government do during a recession?


‘Leaning against the wind’

First, it must be noted that Keynes’ theories championed government intervention, which runs the gamut of government spending, tax breaks, regulation or deregulation and involvement in banks and financial markets.

With the current national debt, some things labeled as Keynesian efforts are often considered to be deficit spendings. John Krieg, associate economic professor at Western Washington University, said Keynes would not have appreciated this comparison, however.

“Keynes was big on government intervention,” Krieg said. “But I don’t think he would have seen himself as a deficit spender.”

Krieg said in any given economy there are periods of economic expansion and then recession, which he called “business cycles.”

“I would argue that there has never been an economy that did not have some form of business cycle,” Krieg said.

Krieg said during the Great Depression, the dominant political thought was that the economy would drive itself out of recession, but that idea did little to assure those in the unemployment line.

“At the time, there was 25 percent unemployment and people thought that was something to worry about, but not something to do something about,” Krieg said. “The thought was that eventually wages would fall, businesses would hire workers and then the economy would return to a period of expansion.”

Keynes was by no means the first person to propose government intervention in a recession, but Krieg said his theories described how government should interact with the economy and, therefore, how it should approach intervention.

“Keynes thought we should use the government’s assets to control the growth or decline of an economy, so it can speed it up in bad times and slow it down in good times,” Krieg said. “He called it ‘leaning against the wind.’”


‘If the government doesn’t help, then who else will?’

Krieg said the American economy is broken up into four major sectors: household consumption spending, foreign and domestic investment, national exports and government activity.

When the economy is in steep decline, Krieg said, there is no amount of household spending or investment or exportation that could get the country back on track.

“The only one left that has the resources and the decisiveness to do anything that could help is the government,” Krieg said.

Bellingham Mayor Dan Pike first learned of Keynes in a high school economics class and he said his theories allowed him for the first time to see the “big picture” of the national economy.

“The idea behind Keynesian economics is that [government] tries to thin out the troughs in our economic cycles, and I think there is a lot of merit to it because we are seeing that if the government doesn’t help, then who else will?” Pike said.

Locally, Pike said the city would take part in a Keynesian approach to the current economy by applying for some of the public works money in the national stimulus package to be applied in the Waterfront district, and he is also looking into the feasibility of a city bond that would pump money into local institutions of higher learning.

“As we are seeing higher and higher unemployment, higher education needs the resources to meet this demand,” Pike said. “People are going to want to be in a stronger position coming out of this downturn.”

Pete Kremen, Whatcom County executive, said he sees government intervention as just one tool in the economic toolbox.

“I don’t see it being the panacea or silver bullet,” Kremen said. “I think it needs to be done in conjunction with a wide spectrum of remedies or tools that we can use to improve the economy.”

Pike said that government intervention sends different messages to different people, but most find it reassuring in uncertain times.

“People see that the government will be there as a safety net and will use its resources appropriately to do things that the government needs to do in order to underpin the economy,” Pike said.

Kremen agreed that not everyone approves of government intervention, however.

“Some people would see it as government intrusion and something that the private sector should be doing and not the government,” Kremen said. “And some would see it as the government cares about improving the economic climate and a sign of concern and movement to make things better.”

Kremen said Whatcom County will focus its requests for the stimulus package on transportation infrastructure, water quality needs such as Lake Whatcom, conservation efforts, law enforcement, flood prevention and improvement of rural community facilities, such as the East Whatcom Regional Resource Center in the Kendall area.

Krieg said all recessions rebound into a period of economic expansion and if the government waits to begin spending until the economy surges upward, then it could create more problems.

“One might argue that by spending more, you might be spending when the economy doesn’t need it, effectively creating deeper debt,” Krieg said.

Currently, the federal government is betting that the economy has a ways to go before it bottoms out and is taking action to intervene and stimulate the economy.


Obama’s American Recovery and Reinvestment Plan

President Barack Obama has said that government intervention is necessary to pull the country out of its economic slump.

“The federal government is a critical element to introduce demand into the economy,” Obama said in his first post-election press conference on Nov. 7. “We stand to lose $1 trillion in demand this year and another $1 trillion in demand next year, so we have this gaping hole in our economy that we must backfill.”

The government will attempt to fill this hole with a newly passed $787 billion economic recovery bill that is a two-to-one combination of government spending on public works projects, education, health care, energy and technology and quick tax cuts, which promise to leave Americans with a little more money on payday. According to an analysis by the Congressional Budget Office, more than 74 percent of the money will be spent within the next 18 months.

Krieg said if a government were going to design a stimulus package, then the money should be spent quickly and not over a period of years because it takes time for someone to earn that money and then spend it.

“If you believe in that public policy, then you should get moving as soon as possible,” Krieg said.

Kremen said the efforts of the stimulus package are laudable, but the availability of resources may have a negative impact on the large number of public works projects starting up nationally.

“If you have all these projects being initiated at the same time, the availability of skilled workers to perform the construction and implementation will be extremely difficult, if not impossible, to attain,” Kremen said. “Then the availability of materials, such as asphalt, concrete and steel will more than likely send already high prices much higher.”

Kremen said he realizes the expedited timeframes are due to the urgency felt in the economy, but the government should look harder at its timing.

“I think as we move forward on implementation of the stimulus package, we need to be more realistic about the timeframes so that the dollars that are injected will provide the biggest benefit and the desired results,” Kremen said.

However, Pike said government officials were elected to make the tough decisions and to act when action is necessary.

“If we wait a couple more months to figure out the problem, you are actually causing more pain by your thumb twiddling,” Pike said.

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