As I’ve been documenting, there’s a disturbing plague of neo-Hooverism sweeping through elements of our punditocracy. Perhaps Nobel Prize winning economist Paul Krugman will come along with a blog post explaining why the neo-Hooverite mania is wrong, but for now you’ll have to settle for me and Dean Baker. But the epicenter of the bug appears to be the opinion pages of The Washington Post and the latest victim is columnist Ruth Marcus who’s skeptically hoping that the next president will embrace what she calls “the New Sobriety.”
This kind of analogistic thinking is deadly when it comes to fiscal policy. For an individual, it’s true that high savings rates are virtuous and bring the prospect of greater prosperity in years to come. Thus, it’s seductive to think that public sector budgeting is the same. But it just isn’t the same.
When you’re facing a recession, especially a recession wherein monetary policy has little ability to stimulate aggregate demand because the banking system is all seized up (remind you of anything?), you need public policy to stimulate aggregate demand. The recession is caused by overall demand for liquidity getting too high. In those circumstances, it becomes rational for any given individual and any given business to also prefer saving to spending. But that only makes things worse. What’s needed is for the government to break the cycle with deficit spending. Marcus’ alternative theory was tried by Herbert Hoover in the early 1930s and again by Japan in the 1990s and it doesn’t work. What did work a little was the New Deal and then the truly balls-to-the-wall spending of World War II worked much better. Excessive virtue amidst the current crisis will doom us all.
Meanwhile, none of this is to deny that it was a mistake for the Bush administration to run up such huge deficits. The flipside of the need for deficit spending during a recession is that responsible political leadership takes advantage of good economic times to reduce the debt-to-GDP ratio. The fact that Bush did the reverse makes us worse positioned to cope with the current crisis than we would be had he behaved more responsibly. But past irresponsibility does not imply that future irresponsibility in the opposite direction becomes a good idea.