Back at the start of 1996, the U.S. unemployment rate was 5.6 percent. Then the assembled investors and businesses of the United States discovered the Internet. Over the next four years spending on information technology equipment and software in the United States roared upwards from a pace of $281billion to a pace of $446 billion a year — and the U.S. unemployment rate dropped to 4.0 percent. The economy grew at a 4.3 percent real annual rate as the spending of the high-tech boom pulled extra workers out of unemployment and into jobs.
Back at the start of 2004, America’s banks discovered that they could borrow money cheaply from Asia and lend it out in higher-yielding domestic mortgages while using sophisticated financial engineering to — they thought, or was it that they claimed? — control their risks. Over the next two years, spending on housing roared upward from a pace of $624 billion to a pace of $798 billion a year — and the U.S. unemployment rate dropped from 5.7 percent to 4.6 percent as the economy grew at a 3.1 percent annual rate. The housing boom pulled extra workers out of unemployment and into jobs.
You can argue (indeed, I would) that spending on neither IT nor nor housing should have risen so massively. It would have been better had somebody taken away the punchbowl earlier. But it did at least pull large numbers of Americans — roughly two million in each case — into productive employment.
The feds — spenders of last resort
Now we are trying to boost employment by making the government the spender of last resort. The government’s money is as good as anybody else’s. What is the argument that the Obama deficit spending plan will not boost employment and production?
There are two of them. The first is to say that an increase in nominal spending will induce businesses to try to hire additional workers and expand production, but that no extra unemployed workers will take the jobs. The effect of the surge of labor demand will be to raise nominal wages and then nominal prices. The total nominal flow of spending will rise, but real production and employment will not because all of the increase in nominal spending would go into higher wages and prices and none into higher production and employment.
I don’t think anybody is making that argument right now, though people have made it in other times and places. In fact, I make it when I think about French president Francois Mitterand’s fiscal policy in the early 1980s.
The second argument is to say that deficit spending must be financed by selling extra government bonds on Wall Street. A greater supply of Treasury bonds will push down their price. As the prices of Treasury bonds fall, the prices of private bonds that are their substitutes will fall as well. Thus businesses that are thinking of issuing new bonds will not do so because the numbers will no longer work. Therefore, business investment spending will drop, offsetting any increase in government spending.
Deficit spending without regrets
The question of what happens to Treasury bond prices and interest rates when the government undertakes deficit spending is empirical. We will be able to see what happens as the stimulus spending takes hold. But because financial markets are forward-looking, we already know that they expect no effect on Treasury bond prices and interest rates. We know this because as the likelihood of the stimulus package passing grew, Treasury long-term bond prices did not fall.
Financial markets are thus voting that the Obama deficit-spending package will succeed: that its implementation will not raise Treasury interest rates and lower bond prices; and that the increase in government spending will not be neutralized by a corresponding fall in private spending.
Follow Blog War over the federal stimulus package:
- Monday, April 6, Brad DeLong: The Stimulus Package: Like the Housing Bubble, Only Better
- Monday, April 6, Tyler Cowen: Good Policy, Bad Timing: How the Stimulus Package Could be Smarter
- Tuesday, April 7: Tyler Cowen: Stimulus Won’t Help U.S. Industry Restructure Itself
- Tuesday, April 7: Brad DeLong: Arguments Against Fiscal Stimulus Exhibit a “Deep Incoherence”
- Tuesday, April 7: Tyler Cowen: It’s Easier For the Government to Print Money Than to Spend It; Or, Monetarism Rulz!
- Tuesday, April 7: Brad DeLong: Fiscal Stimulus Beats Doing Nothing — By a Lot
- Wednesday, April 8: Brad DeLong: Why the Geithner Plan is Good Medicine for the Banking System
- Wednesday, April 8: Tyler Cowen: The Geithner Plan: An End Run Around Congress
- Thursday, April 9: Tyler Cowen: Coming to Grips With the End of Debt-Fueled Consumption
- Thursday, April 9: Brad DeLong: Yes to Economic Restructuring; No to Universal Bankruptcy
- Friday, April 10: Brad DeLong: Final Thoughts: What Would Turn Me Against Fiscal Stimulus
- Friday, April 10: Tyler Cowen: The Economy is in Too Much Trouble for Stimulus to Help
