The Lost Opportunity

Ryan Avent on the lost opportunity of the bubble years:

On the other side of things, it obviously would have been nice to have thought a bit more deeply about how to take advantage of the savings glut. The glut meant that the American government could borrow extremely cheaply (”deficits don’t matter,” said Cheney), which opened the door for a lot of deficit spending. One might have looked at the dynamics of the economy — a manufacturing economy struggling as China enjoyed catch-up growth — and determined to use deficit spending to shore-up the safety net (to help struggling workers) and invest heavily in education, health care, and infrastructure to secure long-term economic growth. Alternatively, one might have decided to spend several trillion dollars on wars abroad. But again, there was not much public demand for a large program of public investment, deficit funded or otherwise.

I think it lets the Bush administration off too easily to chalk this up to lack of “public demand” while at the same time framing the choice in an unduly partisan way to make it a “war or public investment” choice.

The fact of the matter is that after the economic successes of the 1990s, mainstream thinking in the Democratic Party became pretty narrowly obsessed with a particular view of the budget deficit’s role in economic life. The idea was that balanced budgets would keep private interest rates low and keep the economy vibrant. This was a good diagnosis of problems facing the country in 1992–94. But it meant that relatively few Bush administration critics were prepared to spend the years 2004–2007 arguing that it would be smart to engage in massive deficit-financed public investment. It’s not that nobody was arguing that — my former boss Bob Kuttner was — but the orthodox view among the opposition pointed in a different direction.


In retrospect, though, the private sector was taking advantage of low interest rates to make basically unproductive investments in housing.

This does leave us with a significant issue moving forward. It seems to me that when you look at the things that people buy with their private funds, that the United States is the greatest place on earth. We have the biggest houses, the best TVs and computers, tons of cars, etc. Even in the midst of an agonizing recession, this is basically a land of plenty. But when you look at the things that we buy collectively with public funds, you find many areas where the United States falls short. Our schools are not the best in the world. Our sidewalks are not the best-maintained. Our mass transit systems are sub-standard. Our cities are unsafe. Our intercity passenger rail is a joke. Our internet is not the fastest in the world and our electrical grid is incredibly outdated. As we move toward recovery, it seems to me that if we really want to boost living standards we need to shift the balance between private consumption and public investment.