Can government spending stimulate the economy?

You bet it can. The difficulty is in demonstrating the effect of stimulus spending during an economic crisis when spending in massive amounts is generally employed to staunch a recession. How many jobs did the 2009 Stimulus Bill save? Well, to figure that you have to make assumptions about how many jobs would have been lost if the government had not acted.

What you really need to see the effect of government deficit spending is to look at its effect during times of relative plenty. The best example of this is Ronald Reagan’s deficit spending during the 1980s. That’s right, the old deficit hawk ran up deficits through tax cuts and military spending—policies he ran on in 1980 — turning us from the greatest creditor nation into the greatest debtor nation in just a few short years. He took a debt that was only 33 percent of Gross Domestic Product (GDP) under Jimmy Carter and increased it to 53 percent by the time he left office — higher than FDR’s before WWII. Did that deficit spending stimulate the economy? You bet it did. During Reagan’s two terms, the GDP grew more than 30 percent.

George W. Bush pulled a similar trick by passing tax cuts — policies he, too, ran on in 2000 — that eliminated the budget surplus that was handed to him by Bill Clinton (and achievable through a tax bill passed in 1993 by a Democratic congress) and again ran up huge deficits, raising the debt to over 84 percent of GDP. Of course, in the years 2001-2007 the economy grew by more than 15 percent.

Even the most recent attempt to simulate the economy in 2009 was successful by the reckoning of most economists. It just wasn’t as successful as everyone had hoped, but by the same token it wasn’t as large as many had argued it should be, to get the economy running at full capacity again.

All that deficit spending in times of relative economic stability has a downside. Reagan and the two Bushes are responsible for approximately two-thirds of our nation’s debt. (Only about 35 percent of the federal debt is due to deficit spending by Obama, Clinton and pre-Reagan presidents combined.) Only Nixon can go to China; only Clinton can reform welfare; and apparently only Republicans are allowed to run up huge budget deficits.

So much of our current economic woes arise from policies — to a large extent Republican—that have painted us into a corner.  As a percent of GDP, the deficit is as big as it ever has been (nearing that of the debt run up to win WWII) and running up much more courts disaster of another kind. And so, in 2009 when the full extent of our difficulties was understood, Congress’ action to stimulate the economy was by necessity, weak. In fact, it may have been a zero-loss response — that is, it increased the debt by about as much as not acting would have done, but in stimulating the economy it saved jobs.

The problem with relying on stimulus money to help jump start an economy is that it doesn’t fix problems with an economy. If you’re like me, then you believe that there are some structural problems with the economy, which simply stimulating it will not solve. What are those problems? Perhaps our extensive reliance on foreign oil, the managed monetary linking between the dollar and the Chinese yuán, our county’s lack of investment in vital infrastructure, education and science over the past decades, our excessive military spending — these things come to mind as possible problems we as a nation need to address to fix the economy.

The one thing I know will not fix the economy: yet more tax giveaways to the wealthy that got us into this mess in the first place. At a moment when the rich have a greater percentage of this nation’s wealth than at any time since the Gilded Age, federal revenues as a percentage of GDP are at historic lows, and the tax rate in the top bracket are matched only by the historically low rates under Bush II, the rich don’t need more tax breaks.

That will not solve this nation’s economic woes.

Readers can e-mail the author at: jm.horner@yahoo.com

Manitou Middle School seventh-graders run around the high school track Tuesday, Sept. 20, 2011. Every student at the school spent 30 minutes running or walking around the track Tuesday to kick off a program challenging students to run a marathon over the course of 13 weeks, by encouraging them to do two miles a week. “The goal is to get them walking or running,” said Annie Collopy who teaches at the middle school and also is the cross-country coach. Photo by Mark Reis, The Gazette