This has, of course, led to a lively debate within the chattering classes about the effects of what I suppose is now the Old New Deal, with conservatives arguing that the agenda of massive government spending to "prime the pump" of the economy was either only marginally effective or counter-productive. The latest episode in this saga occurred on Fox News, where a one-two punch from Monica Crowley and Gregg Jarrett led their blind-sided victim, David Sirota, to respond in a well-articulated but poorly-thought out column demonstrating two fallacies of the New Deal debate.
The first comes from the conservative side: these advocates of small government, balanced budgets and free markets have an unfortunate tendency of mis-classifying Keynesianism as socialism. The Keynesian argument that government spending power should be used as a substitute for private sector spending during periods of depressed aggregate demand ought not to be confused with a theory of public ownership of capital, nor necessarily a long-term government intrusion into the marketplace. Nor should supporters of free markets be so quick to balk from a regulatory structure that seeks to increase transparency (of firm's ledgers, for instance) and expedite the flow of information about various investments; indeed, free markets are predicated upon readily-accessible information and clearly-defined "rules of the game." I cannot comment as to the extent to which any proposed regulatory measure serves this end, but the knee-jerk opposition to the above policies from conservatives and libertarians is unmerited, and frequently unwise.
This leads to the second fallacy, coming from the liberal side: the purpose of Keynesian-style deficit spending -- the sort being proposed in the second stimulus package -- is intended to "prime the pump," operating only on a short-term basis until private spending and investment resume. As Robert Samuelson writes:
The danger is that pessimism and shrinking spending would feed on each other, pushing output down and unemployment up. By propping up production, employment and confidence, a stimulus package aims to buy time.
But when Sirota makes the argument that the New Deal worked because unemployment fell and production grew, and thinks that a reversal of this trend when government spending is rolled back, he misses the long-term goal: economic viability. Keynesian spending during the New Deal may have propped up the economy, but it can only work for so long (lest we forget, the current downturn is a result of private sector deficit-spending reaching levels that exceeded capacity). The fact that the New Deal apparently failed to restore private sector spending and investment after four years should lead to the conclusion that it left much to be desired.
As debate progresses on the economic stimulus package, it is important that those who stand on the right recognize that the package is a lot more than spending (such as $300bn in tax cuts), and that not all spending is bad; those on the left ought to remember that this is a short-term solution, and should not aim at growing government but restoring free markets. As Samuelson points out:
The incoming Obama administration has understandably focused on the immediate task of designing the stimulus program. It has said less about how it would encourage self-sustaining economic growth. But that, in the end, is the crucial issue. Ever-expanding government budget deficits -- reflecting spending increases and tax cuts -- would ultimately be ineffective and self-defeating.
It is this lack of a long-term plan to restore the economy to viability rather than the short-term proposals themselves that conservatives and libertarians should find so discomfiting.