A Different Recession

Came across this post today - note that it was written in Feb 2008, well before a recession was officially declared, and well before the general public had any idea of the economic malaise that had already begun.

I have heard a few people (mainly those on the right) argue that the federal government's significant deficit spending is reckless in nature - that it is putting a significant debt burden on future generations of taxpayers. They point to the Reagan administration (incorrectly) claiming that it let free market corrections occur in the macroeconomy to restimulate the economy.

First, that simply isn't correct. The Reagan administration (and administrations during the 70's) used monetary policy - lowering interest rates - to stimulate growth. But, the Reagan administration also entered into significant deficit spending during the early-mid 80's (tax cuts combined with increased military spending) thus further stimulating overall economic growth. These actions led to soaring federal debt levels.

Second, the current recession is nothing like those of the 70's and 80's. Those recessions were essentially CREATED by the federal government and Federal Reserve Bank in an effort to control soaring inflation. Only after the inflation was addressed did the government begin to lower interest rates to jump start the economy.

Today's recession is more traditional in nature - it is marked by a severe contraction along with falling real price levels. Further, since the Fed has already pumped record amounts of money into the economy (note the near-0% prime rate goal - caused by the Fed purchasing over $1T worth of securities) without any success in stimulating growth, there is only one place left to turn: the federal government's ability to spend in deficit, an attempts to boost overall levels of demand.

Yes, future generations will face huge burdens of debt, but the alternative might be many years (even decades) of stagnation in the economy - a cost that would far exceed virtually any level of federal debt. That would be a much worse burden to place on future generations.