There are three options government can pursue when the economy goes south. First, the Fed can cut interest rates, buy up assets, and extend credit, all of which the central bank has already done. Second, Congress can cut taxes on businesses and consumers in the hope they will spend more. The first effort—last year’s tax rebates—didn’t have the intended effect since consumers used much of the windfall to pay down debt or save. The substantial tax cuts that will be part of the Obama stimulus package would likely have a similarly muted effect. Businesses and consumers, facing a tough credit environment and needing to repair their balance sheets, will likely use proceeds from the tax cuts to tide themselves over. The third option is for the government to directly purchase goods and services, to substitute the demand that consumers and businesses aren’t providing.
The Washington remnant of the Republican Party—40 senators and 178 representatives—is all for Options 1 and 2, cheap money and tax cuts. But they’re having great difficulty with Option 3. They have forgotten Richard Nixon’s famous line that “we’re all Keynesians now.” To them, spending government funds to goose the economy is unacceptable, not just because of the possibility of poor execution —i.e., pork. No, many are rejecting it as a matter of principle. Even though several Republican governors are pleading for assistance in the form of federal spending, Washington Republicans are saying no.
Newly elected Republican National Committee Chairman Michael Steele laid down the party line on CNN: “Let’s get this notion out of our heads that the government create jobs. Not in the history of mankind has the government ever created a job.” Sen. Jim DeMint of South Carolina succinctly summed up his opposition: “We can’t keep spending and borrowing to get us out of a recession.” Sen. Kit Bond of Missouri concedes that some government spending—such as spending on highways—can create jobs but thinks that spending on mass transit or alternative-transit infrastructure isn’t stimulative.
These claims are so peculiar that it’s hard to know where to begin. Contrary to Steele’s assertion, in the history of mankind, the government has in fact created many, many jobs (including the one he held for a few years: lieutenant governor of Maryland). Today, government accounts for 22.5 million of the nation’s 135.5 million payroll jobs, or 16.6 percent. Those numbers include people who work for the federal, state, and local governments—doctors and nurses in public hospitals and teachers at elementary schools and public universities. Government also has created—and continues to create—all sorts of private-sector jobs, for defense contractors, the aerospace industry, medical-device makers, real estate companies, and construction firms. The economy of the Washington, D.C., area has boomed in recent decades not so much because the federal government has expanded its payrolls massively but because private government contractors have been thriving. As the Bureau of Labor Statistics notes, in January, “the large areas with the lowest jobless rates in December were Oklahoma City, Okla., and Washington-Arlington-Alexandria, D.C.-Va.-Md.-W.Va.”—a capital city, and the capital city.
Contra DeMint, borrowing and spending are pretty much how the government has pulled itself out of every modern recession. And contrary to what Bond argues, mass transit can be plenty stimulative. (Here’s a report from the New York Times on the economic impact of the Second Avenue subway project in Manhattan.) For an example of how a little spending on mass transit might save jobs, Bond could look a little closer to home. The New York Times reported Wednesday on how St. Louis’ inability to fund its bus system means hundreds of employees will find it impossible to get to work. In the case of St. Louis, several million dollars might help save a few jobs. That sounds defensive. But in a period when Americans are losing jobs at a furious clip, when the economy is shrinking rapidly, when monetary policy is near exhaustion, and when tax cuts aren’t likely to work as they do in ordinary times, the highest priority is simply to stop the downward spiral.
There’s plenty of legitimate argument over the stimulus—too much, too little, not fast enough, too fast, the proper mix of tax cuts and spending. Alan Blinder’s op-ed in the Wall Street Journal is an excellent guide to some of the debates. But the Republicans in Washington aren’t reading Blinder. And it’s almost impossible for the Obama team, or anybody else, to engage them in serious discussions. Virtually all the prominent Republican economists who were associated with the Bush administration in any way have fled Washington for the private sector or academia. Today, the congressional Republicans are taking their advice from Joe the Plumber.