The Economy Needs More Stimulus

The economy needs more stimulus to help us out of the recession, says Nieman Watchdog in its latest project, Reporting on The Collapse. The stimulus effort helped us stave off worse disaster, and is helping us recover, and could do even better with even more.  A time that calls for aggressive fiscal policy is not the time to worry about deficits, says Nieman.

I agree: the only reason we hear concern about deficits at all is that it serves as a straw man for opponents of the administration to wring their hands over, in the absence of any useful contribution to make. I think anyone who’s watched impartially has  seen the stimulus work – in fact we’re currently seeing states lay off workers now as the stimulus funds are used up.

Nieman Watchdog is a project created by the Nieman Foundation for Journalism at Harvard University. The project performs some of the background thinking for the media, and suggests questions that journalists could be asking. You can find the Nieman feed in the sidebar on the right for latest stories.

Nieman concludes that mainstream media has failed to cover the economic collapse in any meaningful way. Journalists should give the public information and analysis it can can use to understand what has happened: how, why and where to go from here.

The real story, about why so many believed in the efficient market theory and why it caused them to make colossal mistakes, has not been driven home to the general public. Of course students of economic policy know how profoundly the shock wave from last year has shaken the foundations of conventional economic thinking. But save for the analysis of a handful of writers, the story has never made it into the news. Yet, without that story, it is impossible to have a rational political debate about what do to get out of the trouble we are in and prevent it from happening again.

If bad economic theory got us into this much trouble, shouldn’t we be asking our current policy makers about their economic assumptions? Shouldn’t we be asking about the theory underlying current decisions? And why should such discussions be left to a few experts?
- Doing a better job coping with economic disaster

Nieman is running a series of analyses of the collapse and its aftermath, with the help of Baker and Galbraith – both of whom argue for more stimulus.

Nieman reports that Galbraith in an interview “faulted a prevalent view in the press that ‘getting credit flowing from the banks’ will spur recovery. This is exactly backward, he said. ‘First, comes household recovery and then the credit will flow,’ he said.”

Furthermore:

…full restoration of private credit will take a long time. It will follow, not precede, the restoration of sound private household finances. There is no way the project of resurrecting the economy by stuffing the banks with cash will work. Effective policy can only work the other way around.

Nevertheless, through the $700 billion TARP (troubled asset relief program), “we’ve given all this money to the banks, and the only place they can lend it to is back to the government.”
- Galbraith: Deficits are the solution, not the problem

Dean Baker, asked for stories the press should be pursuing, reported to Nieman that deficits are the only sane fiscal course right now, and that the economy seems quite able to handle them.

The basic story is that we need to have large deficits now for the next several years in order to boost the economy back to full employment. Forcing a large portion of our workforce to endure a prolonged period of unemployment will inflict an enormous cost on those workers and on their children (i.e., those future generations whom the deficit hawks claim as their main concern).

Baker explained that there actually was a ” mathematical basis” for the figures that stimulus advocates were advancing, and the media often neglected to understand or to publish this point.

So what are the chances of getting another stimulus? They don’t seem great to me at the moment, but when the health care dust settles a little the administration may decide to help Democrats in the 2010 elections by stimulating the economy more. This would take some energy as well as courage. But it would count as a truly responsible feat of  public policy.

I think it’s only from ignorance and uncaring that we allow job losses to bear the brunt of economic contractions, there’s actually no economic need for it (the Federal Reserve is supposed to be charged with preventing it in fact).

Recessions are the perfect time to retool, to conduct research, and to retrain the workforce for the future. In both business and government, sustainable budget policy – if there were such a thing – would account for such periodic adjustments.

If the call for more stimulus increases and takes hold, we could witness a marvelous gain as the situation etches into our culture  the knowledge that recessions can be countered by fiscal policy.