Taxpayers can still benefit from a bail-out, by Lawrence Summers, Commentary, Financial Times: Congressional negotiators have now completed action on a $700bn authorisation for the bail-out of the financial sector. This step was as necessary as the need for it was regrettable. …
The idea seems to have taken hold in recent days that because of the … bail out…, the nation will have to scale back its aspirations in other areas such as healthcare, energy, education and tax relief. …[T]he events of the last weeks suggest that for the near term, government should do more, not less.
First,…. No one is contemplating that the $700bn will simply be given away. All of its proposed uses involve either purchasing assets, buying equity in financial institutions or making loans that earn interest. … It is impossible to predict the ultimate cost to the Treasury of the bail-out… But it is very unlikely to approach $700bn and will be spread over a number of years.
Second, the usual concern about government budget deficits is that … government bonds … will crowd out other, more productive, investments or force greater dependence on foreign suppliers of capital. To the extent that the government purchases assets such as mortgage-backed securities with increased issuance of government debt, there is no such effect.
Third, since Keynes we have recognised that it is appropriate to allow government deficits to rise as the economy turns down if there is also a commitment to reduce deficits in good times. …[T]he US made a serious error in allowing deficits to rise over the last eight years. But it would be compounding this error to override … “automatic stabilisers” by seeking to reduce deficits in the near term.
Indeed, in the current circumstances the case for fiscal stimulus … is stronger than at any time in my professional lifetime. Unemployment is now almost certain to increase – probably to the highest levels observed in a generation. Monetary policy has very little scope to stimulate the economy… And … economic downturns caused by financial distress … … are almost always of long duration. …
The more people who are unemployed the more desirable it is that government … put them back to work by investing in infrastructure, energy or simply through tax cuts that allow families to avoid cutting back on their spending.
Fourth, it must be emphasised that nothing in the short-run case for fiscal stimulus vitiates the argument that action is necessary to ensure the US is financially viable in the long run. We still must address issues of entitlements and fiscal sustainability.
From this perspective the … best measures would be those that represent short-run investments that … over time … improve the budget. Examples would include investments in healthcare restructuring or steps to enable states and localities to accelerate, or at least not slow down, their investments.
A time when confidence is lagging in the household, financial and business sectors is not a time for government to step back. …
Originally published at Economist’s View and reproduced here with the author’s permission.
This is an argument I’ve been making too, i.e. that “we don’t have to give up our aspirations for the future.” So I’m in full agreement with the points made below that the expected cost of the bailout is far less than $700 billion and hence not as constraining in terms of out ability to address other problems as many pundits have implied, that countercycical measures are needed immediately, and that fiscal policy dominates monetary policy as a stimulus tool. (And with fiscal policy, I prefer government spending to tax cuts as a means of stimulating the economy since the effect on aggregate demand is more certain, and spending can be directed toward particular, high employment, high economic return projects such as rebuilding infrastructure and addressing environmental concerns). I also agree with the final point made below that as fiscal policy measures are undertaken to stimulate the economy in the short-run, it is best if they also help with long-run problems. But right now, the short-run is the biggest concern: