By Alan S. Blinder
Drastic expenditure cuts would imperil a shaky economy that still isnt generating enough jobs.
It was the British economist John Maynard Keynes who famously wrote that ideas both when they are right and when they are wrong are more powerful than is commonly understood. Indeed the world is ruled by little else. Right now Im worried about the damage that might be done by one particularly wrong-headed idea: the notion that in stark contrast to Keyness teaching government spending destroys jobs.
No thats not a typo. House Speaker John Boehner and other Republicans regularly rail against job-killing government spending. Think about that for a minute. The claim is that employment actually declines when federal spending rises. Using the same illogic employment should soar if we made massive cuts in public spendingas some are advocating right now.
Acting on such a belief would imperil a still-shaky economy that is not generating nearly enough jobs. So lets ask: How exactly could more government spending kill jobs?
It is easy but irrelevant to understand how someone might object to any particular item in the federal budgetwhether it is the war in Afghanistan ethanol subsidies Social Security benefits or building bridges to nowhere. But even building bridges to nowhere would create jobs not destroy them as the congressman from nowhere knows. To be sure that is not a valid argument for building them. Dumb public spending deserves to be rejectedbut not because it kills jobs.
The generic conservative view that government is too big in some abstract sense leads to a strong predisposition against spending. OK. But the question remains: How can the government destroy jobs by either hiring people directly or buying things from private companies? For example how is it that public purchases of computers destroy jobs but private purchases of computers create them?
One possible answer is that the taxes necessary to pay for the government spending destroy more jobs than the spending creates. Thats a logical possibility although it would require extremely inept choices of how to spend the money and how to raise the revenue. But tax-financed spending is not whats at issue today. The current debate is about deficit spending: raising spending without raising taxes.
For example the large fiscal stimulus enacted in 2009 was not paid for. Yet it has been claimed that it created essentially no jobs. Really? With spending under the Recovery Act exceeding $600 billion (and tax cuts exceeding $200 billion) that would be quite a trick. How in the world could all that spending accompanied by tax cuts fail to raise employment? In fact according to Congressional Budget Office estimates the stimuluss effect on employment in 2010 was at least 1.3 million net new jobs and perhaps as many as 3.3 million.
A second job-destroying mechanism operates through higher interest rates. When the government borrows to finance spending that pushes interest rates up which dissuades some businesses from investing. Thus falling private investment destroys jobs just as rising government spending is creating them.
There are times when this crowding-out argument is relevant. But not today. The Federal Reserve has been holding interest rates at ultra-low levels for several years and will continue to do so. If interest rates dont rise you dont get crowding out.
In sum you may view any particular public-spending program as wasteful inefficient leading to big government or objectionable on some other grounds. But if its not financed with higher taxes and if it doesnt drive up interest rates its hard to see how it can destroy jobs.
Lets try one final argument that is making the rounds today. Large deficits it is claimed are creating huge uncertainties (e.g. over what will eventually be done to reduce them) and those uncertainties are depressing business investment. The corollary is a variant of what my Princeton colleague Paul Krugman calls the Confidence Fairy: If you cut spending sharply confidence will soar spurring employment and investment.
As a matter of pure logic that could be true. But is there evidence? Yes clear evidencethat points in the opposite direction. Business investment in equipment and software has been booming not sagging. Specifically while real gross domestic product grew a paltry 2.3 over the last four quarters business spending on equipment and software skyrocketed 14.7. No doubt there is lots of uncertainty. But investment is soaring anyway.
Despite all this evidence and logic some people still claim that fiscal stimulus wont create jobs. Spending cuts they insist are the route to higher employment. And ideas have consequences. One possibly frightening consequence is that our limping economy might have one of its two crutchesfiscal policykicked out from under it in an orgy of premature expenditure cutting. Given the current jobs emergency that would be tragic.
Yet it is undeniable that we have a tremendous long-run deficit problem to deal withand the sooner the better. So it appears were caught in a dilemma: We need both more spending (or lower taxes) to create jobs and less spending (or higher taxes) to tame the deficit monster. Can we square the circle?
Actually yes. Suppose we enacted a modest fiscal stimulus program specifically designed for maximum job creation. My personal favorite is a tax credit for firms that add to their payrolls but there are other options. And suppose we combined that with a serious plan for reducing future deficitsand enacted the whole package now. Then we could in a sense have our cake and eat it too.
A package like that is not fantasy. I believe that a bipartisan group of economists if given the authority free of political interference would design some version of it. But thats not how budget decisions are or should be made. And as long as one political party clings to the idea that government spending kills jobs its hard to see how we extricate ourselves from this mess. As Keynes understood ideas whether right or wrong have consequences.
Mr. Blinder a professor of economics and public affairs at Princeton University is a former vice chairman of the Federal Reserve.
