"You can't spend your way out of recession"
Although I understand the sentiment at a gut level (if your personal earnings went down, you're best response is probably to tighten your belt some), I genuinely don't understand the economic concept here. A recession is a period of time in which the economy shrinks, in which GDP goes down. GDP equals the amount of stuff produced in the country that somebody bought. Thus GDP is directly correlated with buying, which is really the same thing as spending. To quote Wikipedia, "In contemporary economies, most things produced are produced for sale, and sold. Therefore, measuring the total expenditure of money used to buy things is a way of measuring production." It's not like the productive capability isn't there - remember that since the economy is shrinking, it used to be bigger, proving that we have the productive ability on hand - so what's lacking is a willingness to spend. So the only way to get out of a recession is to spend, by definition, if only to get the wheels of production rolling again and to get the public to spend as well. Spending is a civic virtue, thanks to economics; we might as well accept that. You can't not spend your way out of recession. Which raises the question: why are so many politicians and members of the general public against recession expenditure increases when you can deduce that they are a good thing just from a few definitions and a little logic?
Because government spending during a recession not only increases the government debt, but also cause inflation. Furthermore, many politicians (and members of the general public) believe in the Neoclassical system of economics, as opposed to Keynesian, which says that if left alone, everything will go back to normal.
ReplyDeleteHowever, it should be noted that GDP is not necessarily directly correlated to stuff bought—many things bought in the US are not made here and thus do not contribute to our Gross Domestic Product. Additionally, some productive capability may actually be gone—foreign companies could have larger shares of the market, new laws may reduce demand for certain products, etc.—and so that's why much of government spending during recessions is on public works projects, such as schools, libraries, roads, etc., rather than giving out loans to businesses. Anyone can be employed for a construction job, and when people are employed and have money again, they will start buying again, and so what really brings the economy out of a recession is the government paying for jobs.
Yes, government spending can cause inflation. During a recession, that's not that terrible a thing. Inflation means that if you hold on to your money, it devalues quicker, so inflation incentivizes spending in goods and productive capacity. Second, inflation lowers your currency's value against others, making goods bought in your country cheaper for foreign buyers, increasing exports - again, providing a boost to production and productive capacity. And it lowers wages and increases employment, again a good thing during a recession. Also, given your last few sentences, it doesn't seem to me that you disagree with me so much. We've already seen that loaning money to businesses doesn't quite work so well - the banks kept the money on hold after TARP rather than loan it out to others and jump starting the economy as hoped. I only really intended to argue that in order to bring an economy out of recession, some spending measures are needed, whether by government or by other groups - again, against the idea that "you can't spend your way out of recession".
ReplyDelete- The Angry Philosopher
Never said I disagreed with you about spending our way out of a recession :P. I'd argue that inflation does not incentivize spending on goods and production as much as you seem to suggest. If you know inflation is coming, it would incentivize spending, but the Federal Reserve doesn't usually announce it plans to give out millions of dollars. Instead, for most people, inflation simply means higher prices, and that would de-centivize spending, because they'd need to save more to buy the things they really need. It does make goods in your country cheaper for foreign buyers, but America is the world's #1 importer, not exporter (although it is close). Inflation effectively lowers wages, which is a bad thing, because people making less money buy less, and I don't see how it increases employment, unless that's through the government spending part.
ReplyDeleteI would not consider loaning money to banks to be comparable to loaning to businesses. Businesses can (and often will) use that money right away, but it doesn't all stay within the country, which is why the government spending it is better. However, as you said, banks will hold on to it, rather than give it out as loans, especially when they're already in debt, and afraid they won't recover the loans.
We had some warning that TARP was being put together, right? But probably most didn't start spending because that isn't money which is going directly to them, instead it's going to the giant entities in the sky and we're not likely to ever see that money because they want to make sure that they're solid instead of sinking once more.
ReplyDeleteAbout inflation and employment, it's an established economic theorem that as inflation grows so does employment and vice versa.
The main problem that I see with increasing spending during a depression is that government is never able to decrease spending afterwords (as you're supposed to in Keynesian thought). Everyone feels violated when the government takes money away, like with the California financial situation and how much complaining is coming out of plans to cut on schools and other institutions. Thus governments always want to expand their wealth to make it so they can spend more instead of cutting back. If there only was a way to set the government up so that there was an award for spending less in economic up-turns...