What to Do With a Surplus

When thinking about neo-Hooverite thinking in modern macroeconomics it’s striking to me how much anti-stimulus sentiment seems to appeal to a kind of lazy moralism about debt. There’s a sense that going into debt is irresponsible, that irresponsible behavior led to the crisis, so more government borrowing can only make things worse. Michael Boldrin says “People are worried about the future and are sensibly reducing their spending. Does this imply the government should step in and do the spending for them? Put that way, the idea seems like a non-starter.”

But wouldn’t it “seem” like much less of a “non-starter” if the United States were China or Norway and had spent the previous decade running budget surpluses and racking up some stockpile of cash? Imagine if a recession struck, with tons of people thrown out of jobs, and the US government was sitting there on a giant rainy day fund. At the same time, thanks to the recession tax revenues are down. But federal spending on certain mandatory social welfare programs goes up. Fortunately, the giant rainy day fund is more than ample to cover the ensuing deficit. Would it really seem like a non-starter to spend down the rainy day fund in order to cover the gap? I don’t think it would. On the contrary, what would look like a non-starter would be not paying people the benefits promised in legislation. What would look like a non-starter would be raising taxes in the middle of a recession when the government was already sitting on a pile of money.

Now suppose we do that. But we still have state governments with no money-pile and they’re looking at raising taxes and cutting services. Would it really be a non-starter to transfer some of the giant pile of money to state governments in order to prevent them from needing to do that? Does shifting the money-pile from one element of the public sector to the other really change things? Of course not. And why wouldn’t it make sense to use the rainy day fund for this purpose. After all, it’s raining! And if there are some capital projects that might be worth undertaking, what better time could their be than a recession, when labor is cheap since people need jobs, to undertake them? Why not temporarily reduce taxes so that hard-up workers have more take home pay?

I think this all sounds very intuitive. And in economic terms, there’s really very little difference between spending down a reserve of accumulated cash and in taking advantage of an opportunity to borrow at an extremely low interest rate. If the quantity of the borrowing becomes so large that it’s driving up interest rates, then the situation really is different. But I think all stimulus advocates acknowledge that. And if interest rates aren’t moving, then nothing magical happens when the rainy day fund goes from $5 to $-5 and nothing about the lack of fiscal prudence of the Bush administration changes the fact that it would be perverse for the federal government to respond to a recession with pro-cyclical fiscal policies.