Why Federal Spending Matters

By: - December 5, 2008 10:34 am

In a commentary in National Journal, University of Texas economist James Galbraith, debunks the idea that the federal government simply can’t afford to address the nation’s deepening recession. Writes Galbraith:

Right now and for the immediate future, the budget deficit is the only source of demand that can fuel a recovery. Our present problem is not that it is too big, but that it is too small. Far too small.

In principle, economic growth can come from household consumption, business
investment, government spending, or exports. This is a tautology, indisputable and known to everyone who has ever opened a textbook.

After explaining while current conditions prevent household consumption, business investment and exports from generating growth, Galbraith discusses the federal government’s role:

In these conditions, only government spending can pull the economy out of the ditch. Government must spend. It must do so by as much as necessary in order to maintain a high level of employment. Aid to states and localities, an infrastructure fund, increased social security benefits, foreclosure relief, loans or grants to industry, a green jobs program — all can be useful in coping with the crisis. All will, of course, add to the public budget deficit.


In these circumstance, large budget deficits are essential, and preoccupation with budget balance is counterproductive. In very simple terms, it means reducing incomes in the private sector, just when it is most necessary that those incomes be supported, through public spending and tax relief. Those who hang on to simple views of economic virtue in present times need to rethink: time is short and action is needed.

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