The Clash of Ideologies – Economic Policy in Dismal Times

April 6, 2009

During the debate on the Senate floor on The American Recovery and Reinvestment Act of 2009, Senator McCain said, “This is not a stimulus bill; it is a spending bill.” Was he correct in making a distinction? By definition, a stimulus package is a spending package.  It is meant to add to the demand in the economy.  John Maynard Keynes, founder of the school of thought that prescribes aggressive government intervention to energize a slowing economy used an interesting metaphor to make his point – suppose the government would employ workers to dig ditches and subsequently fill these up, even though this would be unproductive use of labor, it will indeed benefit the economy through a process of secondary spending and re-spending – the multiplier effect – which will help create new incomes and productive jobs.

If the outcome of the Obama administration’s $787 billion Stimulus Package is a lasting improvement in the physical infrastructure, in the schools and bridges, in new energies, in the development of the first high speed train in the country, and the education of the young – this not only adds to demand in the short run but also creates conditions for a boost in productivity when the recovery gets underway.  These spending are not consumption or wasteful – they are investment in the future of the nation.  Over the years, both Democrat and Republican administrations have used the idea of fiscal stimulus to rescue a slowing economy.  In 1971, Richard Nixon, no liberal, famously remarked, “We are all Keynesians now.”

Yes, it is the entrepreneurs and the small businesses whose ingenuity and hard work create most of the jobs, but even the entrepreneurs need a framework to be successful.  This includes a healthy banking system, availability of credit, and customer confidence.  Both the House and the Senate versions of the Stimulus package include tax cuts that would result in higher disposable income for low income household to spend.

Tax cuts by themselves are seldom a cure-all for a slowing economy.  Consider the $168 billion Bush tax rebate introduced in February 2008 as part of the $300 billion Bush stimulus package. By most accounts, the impact was minimal. Most economists believe that tax cuts have a smaller bang for the buck due to our propensity to save a chunk of the tax check and the fact that some of the spending is on imported goods.  The supply side benefits of a tax cut popularized by A. Laffer have been found to be wanting.

Jesse H. Jones, the legendary Houston banker appointed as the Federal Loan Administrator by President Roosevelt, wrote, “Old and deliberate methods, dear to many, were necessarily brushed aside in order the people may have food, clothing and shelter, and that their homes and savings may not be taken from them. Fighting a depression is no different than from fighting a war.  In either case the entire resources of a nation must be used in necessary.”

If there was a time to set aside ideological differences, this is the time.  The Republicans should check save their mantra that free market does best when left alone for normal times. We are facing a crisis of historical proportions. A lot of factors cause and sustain an economic slowdown.  Not the least is the fear of failure.  Consumers and businesses pull back and the fear is infectious.  It will help dispel this fear, if the politicians act in a united manner to show their intent and determination to meet the challenge.  A house divided is a house weakened.

There is a clear and present danger that the nation’s economy could get much worse before eventually recovering.  By voting into law a bold stimulus package, the Congress has conveyed a strong message to the rest of the world that America is serious not only about defeating terrorism, but also in once again leading the world as the world’s largest and most dynamic economy.

As President Obama recently said China and other creditor worldwide should feel their investments in America is safe. The American economy is by far the largest in the world and has been a growth engine pulling the global economy.  It is incumbent on the politicians and policymakers to act decisively and responsibly to restore confidence at home and abroad so that America emerges from the recession stronger than before.

Munir Quddus is a Professor of Economics and Dean of the Business School at Prairie View A&M University, Texas. He writes on the history of economic ideas. He can be reached at

email: muquddus@pvamu.edu.

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