Recovery Plan Needs Overwhelming Force

A new compelling argument for why the Obama administration, and progressives, should argue for a bold recovery program, and should not fear large deficits in the near term, was released this week in a paper by Center for American Progress senior fellow Scott Lilly [1].

Lilly looks at the history of American fiscal policy from the Great Depression forward, where the U.S. federal deficit stands today compared to those of other countries, and the scale of the current economic downturn. In calling for "actions of a magnitude that squarely meets the problem," he concludes: "Overwhelming force is a good strategy not only on the battlefield but in economics as well. At this juncture, overwhelming force must come from tax and spending policies—monetary policy options are unfortunately quite limited."

By "overwhelming force," Lilly means an economic recovery package that could be as high as $1 trillion. He calculates that based on projections in a Goldman Sachs forecast of a more than 9 percent annual decline in personal consumption and business investment by the latter part of 2009. That would mean economic demand would fall between $1.1 trillion and $1.5 trillion below what would be necessary to generate growth in the economy.

At a minimum, he writes, the economic package should be $650 billion in the first year—close to double what the Obama administration is considering for the first year. "The bottom line is that a specific amount of money needs to flow into the economy within a specific time period ($650 billion under this analysis) and that amount should not be compromised in order to meet other policy objectives."

Can the economy handle that level of deficit spending? Lilly points out that we have in the past. [2]

Just after World War II, the public debt load was 109 percent of gross domestic product, but economic growth was sufficient to lower that level of debt as a percentage of GDP over time. It was 25 percent of GDP by the early 1970s before it went up again (under President Ronald Reagan, no less, and his successor, George H.W. Bush) to just under 50 percent. At the end of 2008, public debt as a percentage of GDP was about 40 percent. [4]

If the deficit reached $2 trillion dollars in 2009, the debt-to-GDP ratio would rise to 53 percent, and that would still be lower than the debt-to-GDP ratios of Australia, Canada, and much of Europe, and far lower than Japan, which is at 182 percent of GDP. America would still be a very attractive creditor.

That is not to say that deficits don't have a cost. As Lilly points out, the deficits that have been run up by the Bush administration through a combination of untargeted, irresponsible tax cuts and the expensive, unnecessary war in Iraq left the country with far fewer options for addressing the current economic downturn.

But the bottom line is that the fear generated by conservatives over running up a large deficit in the name of economic recovery is just that—fear, based not on facts but on a debilitating combination of ideology and ignorance. It is urgent for the Obama administration and Congress to get past that fear to do what's needed to get the economy back on track for working people.