Robert Reich with a worth-the-read post (cross-posted at NyTimes) on the question of deficit shackles. As it becomes clearer and clearer by the day that Obama is going to be president (minus the “dead girl/live boy in the bed” scenario) then Obama has to think what to do.
He like Clinton will inherit a massive deficit and a recession simultaneously. Famously in the Bob v. Bob throwdown of the Clinton administration (Reich v. Rubin), the Rubinites won, and Clinton moved to ease the deficit (which by the end became a surplus) and not a la Reich put in massive investments in infrastructure, health care, etc.
So will this happen all over again? Obama did pick the Rubinite Jason Furman as his Econ Advisor?
Reich makes what I think is a good case that this time around he needs to be more, uh, Reichian.
In 1993, the upswing out of the recession was already in gear. (The recession was still in but the light was at the end of the tunnel). This time, the recession is just now getting into full swing and will really hit next year. We are nowhere near bottoming out yet on the recession.
As Krugman points out, fixing the financial industry mess will not solve the recession either.
iow, perhaps a neo-Keynesian deficit spending period is in order:
Under these circumstances, deficit spending is not unwelcome. Indeed, as spender of last resort, the government will probably have to run deficits to keep the economy going anywhere near capacity, a lesson the nation learned on a large scale when mobilization for World War II finally lifted us out of the Great Depression.
Finally, not all deficits are equal. As every family knows, going into debt in order to send a child to college is fundamentally different from going into debt to take an ocean cruise. Deficits that finance investments in the nation’s future productivity are not the same as deficits that maintain the current standard of living.
While I have serious misgivings about the whole nationalization/neo-Keynesianism, the infrastructure has to be rebuilt. That simply can not be bypassed again. There is no way to have a functioning, growing economy in the global order with such derelict infrastructure. And I mean both physical infrastructure and regulatory infrastructure.
Otherwise, John Robb is right, and the nation-state will collapse into near total anarchy as the middle class is (in Marx’s terms) immerisated.