Why Stimulus Spending is Essential to Fiscal Responsibility

Thanks to the American Recovery and Reinvestment Act in 2009, the American economy staved off a second great depression, but the economic downturn that began in late 2007 was much deeper than most could imagine.  While the economy is still making gains, those gains are slowing due to unemployment, consumer anxiety and lack of fiscal stimulus.  Think Progress put together the handy chart on the right to demonstrate, with data from the Commerce Department.  In the last quarter of 2009, our GDP grew at a healthy 5.6% annual rate, but that growth had slowed to 2.4% annual  in the quarter that ended in June.

Anyone who is not ideologically and/or electorally invested in the ultra right wing economic policies that caused the Great Recession can easily realize this: in an economic downturn, consumers and businesses stop spending, which then has to be made up for by government spending.  Without that, demand falls, which leads to more layoffs, which leads to a continuing recession.  The government has to take stabilizing measures to help a fragile recover.  That is why 40 prominent economists, including two Nobel laureates, signed a statement calling for additional economic stimulus immediately to help the lagging economic recovery.  Because I can't say it better than these luminaries, here's how they put the need:
We recognize the necessity of a program to cut the mid- and long-term federal deficit but the imperative requirement now, and the surest course to balance the budget over time, is to restore a full measure of economic activity. [...]

The urgent need is for government to replace the lost purchasing power of the unemployed and their families and to employ other tax-cut and spending programs to boost demand. Making deficit reduction the first target, without addressing the chronic underlying deficiency of demand, is exactly the error of the 1930s. It will prolong the great recession, harm the social cohesion of the country, and continue inflicting unnecessary hardship on millions of Americans.
It is important to take note that the statement originated on July 19, when Republicans in the Senate were blocking one of the most effective economic stimulus measures: extension of unemployment benefits.

I have always been a believer in true fiscal responsibility, and I have never seen a conflict between wanting to eliminate waste, fraud, abuse and ineffective government programs to cut the deficit and making the responsible and necessary investment in our people and our economy.  In fact not only do I not believe it to be non-contradictory, I think that investment is an integral part of fiscal responsibility.  The director of the CBO essentially takes the same view.  Budget hawks who tell you otherwise are not interested in fiscal responsibility nor in economic growth but only in ideological stubbornness.

Unemployment extension has since passed and gone into effect.  However, several other stimulus measures still remain on the table that are being obstructed by the GOP:
  • An effort to extend unemployment benefits for those out of work for more than 99 weeks.  Currently over 1.4 million Americans are in this category.
  • A small business jobs bill containing $30 billion in loan incentives and $12 billion in tax breaks for small business, America's job growth engine.
  • Aid for states for Medicaid, public education and public safety.  If the Republican reactionaries in the Senate let anything get past their obstructionist filibuster, it will be half of what the President requested.
  • A $67.4 billion infrastructure investment in transportation, housing and urban development that the House just passed.
  • An energy bill that, at a minimum, makes significant investment in green technologies and green jobs.
Now, let's consider something about the deficit.  The federal deficit exists because the revenue of the federal government exceeds its spending.  Spending cuts in areas that are inefficient and ineffective are absolutely necessary to bring the budget deficit down, but so are enhancement of revenue.  Lost economic activity and lost jobs also means lost tax revenue.  The matter of the loss of income tax revenue is obvious.  But when small businesses go out of business, business tax revenue is lost.  When consumers restrict shopping, states are in a bind due to loss of sales tax revenue, and they look to the federal government for help.

The loss of economic activity causes the revenues to dry up, and in converse, investments that increase economic activity increase tax revenue -- and, by the same token, reduce the need for government spending on certain programs: a robust economic engine and investment that creates jobs will automatically reduce spending on unemployment benefits, state aid, and the very need for that spending.  Once the revenue rises and the need for spending on many programs decline, the additional money can be used to reduce the deficit.  If we do not invest in those things, the downturn will continue, reducing the revenue further, and increasing the need for services further.  That is why government action on economic stimulus is not just essential to our economic health in tough economic times, it is good for the long term budget outlook.  That is why it is fiscally irresponsible to refuse to let measures for economic growth and stimulus advance.

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