As the Senate debates the stimulus plan this week, How the World Works is going to take a look at some of the arguments against government spending to boost the economy.
How does a good Keynesian economist respond when Republicans start worrying about how much additional debt will be piled up on the federal ledger after the government spends another $800 billion to $900 billion on the recovery plan?
Never mind the mind-boggling hypocrisy of this sudden attack of fiscal rectitude from the party that spent the Clinton administration's budget surplus in a mad frenzy of war and tax cuts. That's too easy. The real answer is that doing nothing could lead to even more red ink.
Let's outsource this to Mark Zandi, chief economist at Moody's Economist.com, who served as an informal advisor to the McCain campaign. Speaking at a press conference on Friday with Democrat Sens. Chuck Schumer and Jack Reed, Zandi made the problem very simple:
But it is important to consider that the nation's budgetary problems would likely be even worse if policymakers do not respond aggressively to the crisis, because the sliding economy would undermine tax revenues and result in much higher government outlays that supported all the folks that would be losing jobs.
Add it up. A contracting economy equals higher unemployment and less government revenue. So while on the one hand federal and state governments will be finding the demands on the safety net expanding, their ability to pay will be decreasing.
Worrying about increasing the federal debt in the middle of the worst economic contraction in 30 years is like worrying about the paint trim on the Titanic getting scratched by an iceberg.