"What Could Stave Off A Recession" - my comments

Businessweek contains an interesting article, titled "What Could Stave Off A Recession". The main point is that government spending targeted at education and health care would be a more effective way of using countercyclical Keynesian policy in order to put the skids on a shrinking economy.

I've got some thoughts about this, and also in response to reader comments.

My comments on article:

Businessweek is correct that health care and education (especially the former) are projected growth areas. One issue of concern - both primarily cater to domestic individuals.

The quality of emergency health care in this country is still very good, though there are obvious issues with its cost, an incentive structure that discourages preventative care, and general individual lifestyle/education issues that compound American health, quality of life, and life expectancy. But the growth will primarily come in geriatrics - in which those who can afford to pay, will, and those who can't, will depend upon Medicare/Medicaid for long-term care. Though we might add more jobs in elder care, it may come at the cost of additional federal expenditures, since even with Medicare/Medicaid, community care facilities have an average -7.2% pretax margin. (“The Most and Least Profitable Businesses to Start”, Forbes, 18 Jan 2008)

Impact:
- Care primarily focused on Americans
- No major effect on trade imbalance
- Neutral/Negative on national debt/Medicare unfunded liability

Education faces similar issues, partly because the advantage the United States has in higher education is decreasing with renewed efforts on the part of national efforts to develop top-tier domestic institutions. This will take a while longer for Europe, India, and Asia to develop - unless these nations choose to use their recent commitments in areas of R&D to focus their educational institutions around specific fields and subfields. While the Ivy League may remain on top for a while, it might not be surprising to find in the not-too-distant-future a large number of Singaporean medical/drug researchers, Indian systems engineers, and European materials scientists that will carve away certain sectors of the educational advantage once held by the United States. When they stop coming here to study, we will lose their tuition money and their long-term contribution to American research, industry, and cultural/social intangibles.


Responses to reader comments
(in order from past to future - I would have included them here, but I'm a bit uncertain about the copyright law in this area)

Mike:

An economy supported by war spending is an example of Keynesianism (specifically, military Keynesianism). Keynesianism only suggests that the government spend money to increase employment - it does not require that the employment be particularly useful, productive, or moral. Many of the alphabet-soup programs initiated by Roosevelt during the 1930s did improve the infrastructure of the economy, but many programs could legitimately be called "make-work". The key is to keep employment as low as possible, and enough money in the economic system to avoid a decrease in demand.

Jayendra:

It is precisely that fear that led to a breakdown of the classical model. A rational individual will stuff their money in a mattress (c. 1930s) or commodities/money market funds (c. 2007) because of fear of further downturns. However, when A LOT of rational individuals do this, you get a classically "irrational" result - that is, a feedback effect where each drop in consumption/investment spending leads to increased fear and more money effectively taken out of the system (mattresses, gold, and euros). I'm not saying you should spend money just to keep the economy afloat - only the government has the resources, incentive, and - for now - a sufficiently large line of credit to do that.

Hugo van Randwyck (and Phil Owen):

A "sin tax" on gas, coupled with a lump-sum transfer (tax rebate) could work to reduce American dependence on foreign oil, which in the long run might be healthier for the environment and the economy.

Additional spending It might provide the economic incentive to fund increased R&D. However, research-grade scientists already have near-zero employment - you would need to increase the supply of researchers, which would take many years to train, and many years of economic conditions still making it valuable to pursue advanced degrees in engineering, materials science, operations research, and basic science.

Timeframes are important. If gas hits $6 a barrel through a tax, what will happen to a large number of commuters who can't absorb the cost? In my native Los Angeles, many people commute over an hour and a half precisely because their budgets are pressed so far that they cannot afford housing closer to their home. Substitution goods - public transportation - are not as well funded as that found in many European cities. Even if the tax on gasoline were used to fund new public transportation, it would take a considerable amount of time to mount such a campaign. Meanwhile, you have rapid inflation of everything from foodstuffs to big-ticket items, which could lead to a period of extremely painful stagflation (decreasing GDP + inflation).

There is also an issue in which China has been reluctant to float its currency, precisely because they want to keep a positive trade balance. The issues are more complex than I understand, but appear to be well articulated in the January/February issue of the Atlantic Monthly.

Rakesh Mehra:

One problem with this is that overseas profits are, for the first time ever, responsible for the majority of many firms' profits. These firms, which do pay taxes (we can argue if they pay enough), do face competitive pressures from overseas. A unilateral effort on the part of the US Government to stop outsourcing could, in the short-term, reduce badly needed tax revenues, and, in the mid- to long-term, erode American companies' market share in the international markets, leading either to decreased revenue (and decreased taxes), and/or layoffs of domestic workers.

Outsourcing is an issue - the US would do well to look into beefing up its Trade Adjustment Assistance program and seriously consider restructuring its education programs and government procurement priorities. But a general tax on outsourcing would not help, and could do much harm.

Chandra SR and Jayendra Sai Chelluri:

This article pointed out that the financial sector has not added a large number of jobs since 2000 - though one could argue that there might be a multiplier effect as these white-collar employees spend in their local community.

Subprime is exacerbating a correction in the housing market that may have started a couple years ago. It is a symptom of a business cycle change meeting poor decisions at all levels - individual, corporate, and national.

I agree that it is tough to find buyers when people are pessimistic about the future - and sellers are unwilling to sell their houses at market values (insisting that they at least recoup their original purchase price. (See NYTimes article "A reality Checl for Home Sellers, NYTimes Sept. 23, 2006) In Southern California, I've got anecdotal evidence (sorry, no hard data) that property value increases had been driven, in part, by wealthy Taiwanese/Chinese immigrants. This may help in the short-term with a decrease in housing value (though the impact might be small), but is separate from adjusting the issues stemming from an artificial situation of low savings rates, consumer debt, and low inflation and interest rates, all sustained by external debt and wagers on future productivity increases.

Shelley Mizener:

Agreed. But I think there's room for all people - local and national - to chip in. I agree it'd be ridiculous to wait for it from the top, but individual responsibility and action will find a greater opportunity for success if policies at the national level can facilitate both micro initiative/change and macro stability.

David Esrati:

Your ambitions are noble, and I wish you the best for your election. But I would add a cautionary tale by one of the better American presidents. JFK found, prior to and during his term, that he needed to recognize the importance of Wall Street firms and "big corporate interests" in providing jobs. The provision of jobs is based on the profit motive, yes, but also on a reasonable assessment of the mid-term future prospects. Implied in this is a sense that some sense of stability is needed in order for businesses to keep people employed.

Yes, policy can change the way individuals do business, especially if done with a popular mandate and in a non-combative fashion. But the near term requires coordination - or at least dialogue - with the Nation's businesses, large and small, and an understanding that no one wins if we deviate from the key issues and problems.

Li:

Keynesianism isn't focused merely on spending money that we don't have. There are two key points - first, to avert a downturn, the government increases spending to improve the economy. After recovery, the government decreases spending and pays down the debt through budget surpluses.

It is fair to argue that it's not politically realistic to expect a party taking control during a recovery to decrease spending. It is also fair to argue that the basic model may not accurately account for various firms and individuals pricing in government intervention, to the point where deficit spending is less effective than predicted.