The other day I was talking with a co-worker about the dire state of our economy and the President Obama's stimulus plan. She's does not follow politics obsessively (yes, I do). She lives in a very depressed state and has been involuntarily under-employed for quite a while. She's not poor, but she is certainly among the economically anxious. And she voted for our new President and wishes him well.
But she was not sure about his stimulus plan. The conversation went something like this:
I knew I should be able to explain why, at this moment in time, we should fear more that people will stop spending, than that this country will go back to unthinking consumption. But I wasn't able to be convincing.
For those of us who have always worked at not carrying big debts, who don't run up credit cards, who have tried to save for the future, it is hard to understand why the government should now be trying to get people spending again. Didn't greed coupled with individual irresponsibility run the economy off a cliff in the first place?
Well , yes, but most economists agree that the danger now is that people and businesses will become fearful, save (hoard) what cash they have, and our economy will fall into the stuck place they call a "deflation." Here's Paul Krugman:
What does he mean? Fortunately, Matt Yglesias today took a crack at putting this in understandable terms. He says, just suppose
We're living in a time when individual decisions not to spend, added together, can and will add to the tailspin the economy is already suffering. Those rational, responsible decisions will lead to more people being laid off, less reason for businesses to invest or expand, and more people who need help from the safety net.
And in such a time, most individuals won't be able to risk spending more -- they'd be irresponsible, as my friend said. But some push to get the economy working again has to come from somewhere and only the government can afford it today. The bet is that a growing economy tomorrow, spurred by spending today, will enable the government in the future to pay down the debt it takes on now. The U.S, government has always been able to grow back into solvency; lenders, even today, still seem to trust that it will be able to pay its bills in the future.
So if we are to have a hope of a prosperous future for our society, we need stimulus spending now. In fact a lot of economists think what is likely to come out of Congress is not irresponsibly large -- it is irresponsibly small. Maybe someday I'll learn enough to be able to talk about that coherently.