March 16, 2009
As politicians and pundits debate the role of government in helping the economy, they will do well to read up economic history, including the history of economic ideas. The quote in the title of this article is from John Maynard Keynes, the British Economist who died in 1939. Keynes ideas presented in his 1936 magnum opus, The General Theory of Employment, Income and Money are largely credited with revolutionizing macroeconomic theory and economic policymaking during times of crisis.
To Combat Recession, Is an Economic Stimulus Necessary?
On February 17, 2009, President Obama signed the $787 billion The American Recovery and Reinvestment Act of 2009 designed to jumpstart the moribund economy passed. The bill was enacted after a bruising tussle in the Congress where it gathered zero Republican votes. Was the decision by the opposition to say no to the Stimulus Package based on good economics or on politics as usual?
A large number of economists in academia, business, and in government, prescribe increased government spending to cushion and reverse an economic slowdown. They may quibble on the size of the funds to be borrowed, the method of financing, and how government funds should be spent, but fundamentally there is broad agreement that when the private economy hits the brakes and starts skidding, and the Federal Reserve has exhausted its arsenal to re-energize the economy, government spending or deficit financing is about the only game left in town.
Call it a Stimulus Package or Recovery Act, the basic concept is the same – since the problem is inadequate demand and private spending by business and consumers, government can step in to boast demand and create jobs in the immediate run and provide a cushion to the downward spiral of an economy that has temporarily spun out of control.
Are there negative side effects to this medicine for the ailing economy? Well, certainly. Almost always there are winners and losers when a regulation is enacted, or a tax or spending policy changed. For starters, increased spending will result in an increase in budget deficits, national debt, some crowding out of private investments, possible waste, and inflation. All of this may come about in the future with varying degrees of certainty. Why then support the stimulus? Why not let the economy reboot itself however long it takes?
Because managing the economy is not unlike managing a private sector organization or treating of a sick patient. Using a medical analogy, almost every medication prescribed by the doctor has some negative side effects. The exact prescription for treatment and recovery depends on the seriousness of the sickness, and the patient’s ability to withstand the negative side effects. When the patient is seriously ill, doctors are willing to prescribe strong medicines and even surgery to save and eventually heal the patient.
Similarly, when the economy is buffeted by destructive winds of a category five economic hurricane, inaction by the government on the belief that in the long run winds will calm down, is hardly prudent economic management. The economy and the society is far better off with an effective Stimulus Package as a crisis management tool to be followed by prudent policies to rebuild the foundations of long term recovery and a sound economy, once the emergency is over.
Munir Quddus is a Professor of Economics and Dean of the Business School at Prairie View A&M University, Texas. He writes on economics and related subjects. He can be reached at