Government stimulus is the way forward

The debate about President Obama’s jobs plan is really just an extension of the long-standing disagreement in the country over the role of government in jump-starting the economy.

Most of the media coverage has been about the stalemate between the 236 of the 242 Republican members of the House of Representatives who have taken an oath to never, under any circumstances, raise taxes and Democratic members who refuse to negotiate on entitlement spending until new revenue is part of the solution.

The even bigger, more fundamental argument between the two sides, however, is whether or not the government has any role at all in moving the country out of the recession.
One side says the American Recovery and Reinvestment Act of 2009 — the stimulus bill — was a complete failure.

Yet, as I have pointed out in previous columns, in the quarter the ARRA passed, the Dow Jones average started to climb and has never looked back. The precipitous decline in jobs — a loss of over 700,000 a month when the bill was passed — was turned around. Although the numbers have never been high enough, we have seen positive job growth. GDP, which was falling, also moved into positive ground.
The truth is that the ARRA helped, but the economy is still in trouble because we were in even worse shape back in early 2009 than we thought at the time. The size of the stimulus — the largest that could pass Congress — was simply not ambitious enough.

My question for those who believe otherwise is this: If there is no government action, why will the economy recover? Because of the private sector?

The private sector, despite record profits in the case of many companies, has largely been absent from the recovery effort. American corporations are sitting on $2 trillion that they could use to invest in new businesses and hire new employees, but with a few exceptions, they aren’t making those investments. In fact, some are using their cash to buy back stock and increase executive bonuses.

Banks have trillions to lend, but they are holding back as well. Talk to anyone who is in real estate or running a small business and they will tell you how difficult it is to get a bank loan.

Why are corporations and banks not investing and lending? When I was earning my MBA at Wharton, on the first day of a class devoted to investments, the professor stressed that investments should be made based on their potential intrinsic value — creating a new product or manufacturing process that would bring value to the marketplace. Because the economy has been hit so hard, it is difficult to find those investment opportunities in the present economy.

Banks are faced with a housing market that is still falling. Housing has usually been the sector that has led the way out of past recessions.

This time, because of the housing bubble and the crash, it is instead an anchor continuing to drag the economy down.

It is a vicious cycle. Businesses large and small need to see more demand for their products before they can hope that banks will lend them money to expand and begin hiring again.

Lower taxes and fewer environmental regulations will do nothing to create that demand. To break the cycle, we have no choice but to move ahead with more government action. Only when more demand is created will the private sector begin to expand and hire.

In the 1990s, Japan tried to end a serious recession without major government intervention. It experienced a “lost decade” of no growth.

I, too, am concerned about the U.S. debt level, especially as a percentage of GDP. But if we do not get this economy moving in the right direction again, we will continue to see a decline in government revenue, and larger and larger deficits. The debt, as it did in Japan, will get far worse.

We’re in a tough place. There is no magic bullet. But those who argue against government action have one big question to answer. If government has no role in the recovery, and the private sector is doing little or nothing, how will the economy come back?

Originally published 30 Oct 2011 on delawareonline.com