The Missing Mission For Government Spending
CAMBRIDGE – The need to stimulate demand in the United States and other developed
economies has provoked a debate that goes beyond economic technicalities to
questions about government’s overarching responsibilities. Like the great economist
John Maynard Keynes before them, Larry Summers and Paul Krugman have advocated a
greater role for public spending to compensate for weak private-sector demand. But
the justification for such a policy must transcend economic logic if it is to win
political support. A greater role for government requires an overriding mission.
At an IMF Conference last November, Summers invoked the specter of “secular
stagnation,” a condition in which aggregate demand persistently falls short of
potential supply, generating under-employment and slow, if any, growth. Summers
suggested that a speculative and unsustainable financial bubble had been required to
create even a simulacrum of full employment in the decade or so before the crash.
Unfortunately, that bubble also led to the 2008 global financial crisis and the
subsequent Great Recession. Moreover, recovery from the nadir in 2009 has been
frustratingly slow, with employment as a proportion of the working population
remaining virtually unchanged. According to Krugman, this is a familiar story –
consider the failure of the late-1990’s tech bubble to generate sustainable growth –
that goes back three decades.
Both Summers and Krugman argue that one of the biggest constraints on monetary
policy during such crises is the “zero lower bound” for the policy interest rate.
They suggest that the real rate of interest at which investment and savings would
reach equilibrium at a level of output consistent with full employment is now
negative. Unfortunately, they acknowledge that the alternative of a debt-financed
fiscal stimulus would also be impossible in America’s current political climate.
In his frustration, Krugman even invoked Keynes’s famous challenge to orthodox
thinking on the question of persistent economic stagnation:
“If the Treasury were to fill old bottles with bank-notes, bury them at suitable
depths in disused coalmines which are then filled up to the surface with town
rubbish, and leave it to private enterprise on well-tried principles of
laissez-faire to dig the notes up again…there need be no more unemployment and, with
the help of the repercussions, the real income of the community, and its capital
wealth also, would probably become a good deal greater than it actually is.”
Or, as Krugman put it: “[S]pending is good, and while productive spending is best,
unproductive spending is still better than nothing.”
But, despite his impeccable economic logic, Keynes lost the policy debate. Instead,
policymakers argued that unproductive, debt-financed government spending would panic
businessmen and bankers into reducing further their already-low support of economic
activity (and this at a time when Britain’s unemployment rate was triple its current
A similar situation was playing out in the US, where President Franklin D.
Roosevelt’s New Deal public-works programs were attacked as wasteful boondoggles.
The subsequent retreat to fiscal virtue triggered the 1938 “Roosevelt Recession.”
Two years later, a rueful Keynes wrote:
“It is, it seems, politically impossible for a capitalist democracy to organize
expenditure on the scale necessary to make the grand experiment which would prove my
case – except in war conditions.”
Krugman has suggested, satirically, that the necessary initiative “involves faking a
threat from nonexistent space aliens.”
What both Keynes and Krugman realized was that sustained state investment in support
of economic growth depends on the existence of a political mission that transcends
economic calculus. In the past, the overriding mission was national development, and
the policy instruments were mercantilist: the appropriation of available
intellectual property, and the protection and subsidization of select infant
industries in order to achieve global competitiveness.
This imperative was evident in England’s pursuit of Flanders in the sixteenth and
seventeenth centuries; in the economic and military pursuit of Britain by the US and
Germany in the late nineteenth century; and in the rise of Japan, the East Asian
Tigers, and China in the twentieth century. It was apparent in America, too, during
the Cold War, when national security concerns justified an economically active
state, even as extensive social-welfare systems were supporting aggregate demand
across the rest of the developed world.
Although Jeffrey Sachs has criticized Summers and Krugman for advocating a
deficit-financed “consumption-led recovery,” they would not disagree with Sachs’s
argument that “America urgently needs investments in modernized infrastructure,
advanced science and technology, and job skills appropriate for the twenty-first
century.” As he points out, “Large-scale investments remain impeded because the US
lacks basic strategies in all key sectors. We have no national energy strategy other
than fracking; no modern transportation strategy; no coastal protection strategy; no
But Sachs might have strengthened his case had he also recalled that during the Cold
War, US national transportation strategy was implemented in the 1956 National
Interstate and Defense Highways Act, and its national education strategy was
implemented as the 1958 National Defense Education Act. Indeed, tilting at a
supposed Keynesian propensity for consumption-led recovery is at best a distraction.
As Summers rightly responded:
“Some have suggested that a belief in secular stagnation implies the desirability of
bubbles to support demand. This idea confuses prediction with recommendation. It is,
of course, better to support demand by supporting productive investment or highly
valued consumption than by artificially inflating bubbles.”
Yet what all participants in this debate have neglected is the need to justify such
investments politically – to address the issue of the “missing mission.” If
demonization of government by market fundamentalists is to be overcome, there must
be a greater purpose than simply avoiding another financial crisis or deep recession
– as Keynes learned during the Great Depression.
We do not have to look far for such a mission. The case for acting on a massive
scale to combat climate change has been made in Europe, and even in China. Why has
there been such little debate in the US? Is it because those who oppose such
discussions reject the science of climate change? Or do they deny the science
because accepting it would legitimize an economically activist state?
William Janeway, a managing director and senior adviser at the private-equity
firm Warburg Pincus, is a visiting lecturer in economics at Cambridge
Copyright: Project Syndicate