Public Investment and Recession

There's also a strong argument for a stimulus program that emphasizes public investment at the state and local level. State and local government revenues--which primarily finance education, healthcare, public safety and infrastructure--are always badly hit by economic downturns and will be especially strapped as a result of the current recession. State and local government revenues decline when the incomes and property values of their residents fall. Property tax revenues will fall especially sharply as a result of the collapse of housing prices. Moreover, state and local governments, unlike the federal government, cannot run deficits and are forced to maintain balanced budgets, even in a recession. This means that unless the federal government injects new revenue into the state and local budgets, spending on public investments will decline.

Deficit Reduction: The Responsible Alternative?

The federal fiscal deficit in 2007 was $244 billion. Shutting down the Iraq War and using the fiscal savings to cut the deficit would mean a 57 percent deficit reduction.

Is this the best use of the funds released by the Iraq War? Of course, the government cannot run a reckless fiscal policy, no matter how pressing the country's social and environmental needs. But a $244 billion deficit in today's economy is not reckless. It amounts to about 1.8 percent of GDP. This is slightly below the average-sized deficit between 1960 and 2006 of 1.9 percent of GDP. The largest deviation from this long-term average occurred under Ronald Reagan's presidency, when the deficit averaged 4.2 percent of GDP--i.e., more than twice as large as the current deficit as a share of the economy.

The recession and stimulus program will of course produce a large increase in the deficit. Recessions are not the time to focus on deficit reduction. But even if we allowed the deficit to double from its 2007 level--to about $500 billion--its size, as a share of GDP, would still be below the average figure for the entire Reagan presidency, including both the boom and recession years.

We would certainly need to worry about the deficit today, and even more after the recession ends, if it were persistently running at Reagan-era levels. This is because the government would soon be consuming upward of 20 percent of the total federal budget in interest payments, as it did at the end of the Reagan era. This is opposed to the 10 percent of total government spending we now pay to the Japanese and Chinese bondholders, US banks and wealthy private citizens who own the bulk of US government debt. But because the deficit has been at a reasonable level coming into the recession, the primary problem with the Treasury's fiscal stance is not the size of the deficit per se but how the money is being spent--that we are using the money for Iraq and a private consumption-led stimulus rather than public investment.

There are many good reasons government policy should now initiate major commitments to investment in the areas of healthcare, education, environmental sustainability and infrastructure. All these spending areas stand on their own merits. But moving the $138 billion spent on the Iraq War in 2007 into public investments will also increase employment, adding up to 1 million jobs. On top of this, expanding public investment spending is the single most effective tool for fighting the recession.

A great deal is at stake here. The Iraq War has been about death and destruction. Ending the war could be a first serious step toward advancing a viable program for jobs, healthcare, education and a clean-energy economy.

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