U.S. Markets open in 56 mins

The Case for MORE Spending to Prevent a Recession


It took Jimmy Buffett three verses to admit it in Margaritaville, but even he figured it out eventually.

"Some people claim that there's a woman to blame,
But I know, it's my own damn fault."

Get the idea?

Dean Baker sure does. He's the Co-Director of the Center for Economic and Policy Research, and a believer of the theory that we are our own worst enemy when it comes to getting the country back on its feet, financially speaking.

"We're worsening the economy," Baker says. "The government was helping originally with President Obama's stimulus package but it wasn't big enough and now most of that has faded out, so most of the spending has already taken place."

And even though we have very little to show for all that spending, this PhD in economics from the University of Michigan thinks we have no choice but to spend even more. He says the country is fixated on reducing the deficit when we should be consumed with creating jobs and boosting the economy. He figures the combined effect of state, local, and now Federal spending cutbacks amounts to roughly a 1% drag on GDP.

And even though our Federal Reserve Chairman Ben Bernanke is an expert in the great depression, Baker says we are about to make the same mistake FDR did 75-years ago. "The unemployment rate when President Roosevelt came in was 25%," Baker says, and with the help of several unprecedented works projects, FDR "go it down to 10%."

And then the historical parallel/warning.

"FDR had his own deficit hawk period in 1937 that cut back on all these programs and sought to balance the budget and we had a second recession. So the moral of the great depression was that the program worked but they weren't pursued far enough. There's a big difference between 25% and 10% but that still not where you want to be."

When pressed to defend the efficacy of federal spending he says, "stimulus does directly create demand in that you're paying people to do work. It does create jobs."

For a while maybe. But then what? And what about stoking underlying consumer demand and indebtedness? "In terms of people underwater in their houses, stimulus doesn't directly do anything about that" he says, whereas time (simple, old fashioned, waiting) and a modest increase in prices would.

Baker explains that "modest inflation of 3-4% would be a good thing because you'd expect house prices to rise in step with inflation and that would allow people to get out from beneath these crushing debt burdens."

And as for job creation, "firms don't hire because you give them money... they hire because they need workers and they don't need workers right now because there's no demand."

It feels like we are going around in circles here, but to create demand when none exists organically, Baker says we need to devalue the dollar. Not by some piker amount but by an additional 20%. Keep in mind the dollar is already down about 15% this year, and off by about a third from where it was 10 years ago.

"We need to address our trade imbalance. We need to get the dollar down. Macho guys in Washington say they want a strong dollar and don't know what that means or don't care." Like a good professor, Baker explains, "what it means is U.S. goods are uncompetitive in international markets. If we had somewhere even near balanced trade, instead of a trade deficit around 4 to 5% of our economy, you'd be looking at 4 to 5 million jobs in manufacturing."

Do you buy it? Should the U.S. take on more debt to try to prevent another recession or are we just throwing good money away trying to soften the inevitable?

Lets us know below!