To be honest with you I don’t even like this conversation because people interpret my views as ‘left wing’ or some other ideological overlay. My personal views on politics and economics run quite conservative. I think government should stick primarily to the provision of public goods/services and anything where there is a viable ‘market’ should be left to the market. If there is a monopoly (no viable market), government should regulate but not necessarily have direct ownership. If it is something essential to the workings of society (a sector like energy) there should be a regulatory framework for the industry to protect citizens – but there is no inherent need for direct public ownership. To further bolster my right wing fanatic credentials, I think government transfers to individuals should be means tested. I don’t like government paying people for things they could afford themselves and I include a lot of health care spending in this as well (in my ideal model, people who could afford it would pay directly or through insurance for basic health care services and the public system would cover large costs – i.e. if you get cancer). This last one will come back to bite me if I ever decide to go into politics.
With that said, I dislike people who say that economic stimulus has failed. I guess the term ‘failure’ depends on how you define it but in straight economic terms if government picks up the slack in the private economy for a short period of time it does have the effect of supporting the economy (jobs, taxes, etc.). Governments running short term deficits should be viewed no differently than a firm or individual doing so. Obviously this can get out of control and there are credible folks saying the U.S. and much of Europe is reaching that point.
The crux of the issue is that some folks say that government spending actually crowds out private spending. In other words, they believe when the government increases spending, the private sector reduces spending so the net impact is negative.
There may be some crowding out effects but it is never that cut and dried. While I appreciate the view that wants to limit government spending, not all government spending is ‘bad’.
In my considered view, if government had not increased spending in the wake of the recession it would have been a lot worse – probably in the U.S. it would have ended up being a technical depression. However, there is truth to the view that coming out of the recession might take longer as a result of deleveraging. But then again, as we have seen, the markets are driven by emotion and a full scale depression might have created even more unintended consequences.
I will end by bringing in my right wing fanatic credentials, again. I do think that government policies in the U.S. created the housing bubble and much of the reckless behaviour in the financial markets. Even if you want to encourage home ownership there has to be sanity.
Canada’s housing and financial systems are much less dysfunctional than the U.S. and we didn’t feel the impacts of either bubble as much.
In the end, you will see more and more people crowing about the failure of economic stimulus and I guess turn about is fair play but in the back of our minds we have to ask ourselves if it would have been much worse otherwise.