The economy is in need of some big-time stimulus. What you want to hope is that with stimulus, wages and income (“main street”) can remain strong enough for long enough that the currently underway government interventions to fix the banking system (“wall street”) can work, and then private enterprise can get back to the business of taking out loans to fund new projects. What you fear is that the problems in the banking system will cause job and income losses so severe as to undermine the banking system faster than it can be fixed, leaving us God knows where. This probably means a bigger stimulus than what Democrats are currently proposing — something along the lines of a repeat of the earlier $152 billion package has a bit of a “bailing out the boat with a leaky cup” quality to it.
Brad DeLong says “I would say $300-$400 billion, aimed at least half at infrastructure and state budgets, all to be recouped in the out-years.”
Meanwhile, Roy Blunt is on a crusade to destroy the economy:
Rep. Roy Blunt, the Missouri Republican who serves as House minority leader, said he would support a stimulus plan if it did not include massive public works spending and budget bailouts for states that overspent on health care and other social programs.
“A stimulus plan that makes sense is something that I’ll be helpful with,” Blunt said, also on ABC television.
In other words, he would support a stimulus package that doesn’t include the most valuable stimulus measures. Beware any talk of “budget bailouts for states that overspent on health care and other social programs.” What’s happening to states is that when the economy slides into recession, tax revenues fall. At the same time, the demand for Medicaid and other safety net services rises. This creates budget deficits. Deficits that states are not allowed to run. So state government responds to downturns by cutting back spending, which makes the downturns worse. This is a bad feature of American federalism, and it would be good for some clever person to devise a means of forcing states to build up large “rainy day” reserves during the happy times in order to avoid this problem.
But the time to do that is before the downturn, not amidst one. Meanwhile, the victims of Blunt’s refusal to “bail out” state governments will be not state government, but rather you, me, and the rest of the public. And what makes this especially puzzling is that a secondary victim of a refusal to pass a solid stimulus package will be incumbent Republican politicians who desperately need some sign of economic improvement by Election Day in order to hang on to their seats.