Feb. 23, 2009 – 20:31:31
Gov. Bob Riley has frequently shown himself to be a progressive leader, but his latest pronouncement is wrong-headed.
He said Monday he is considering rejection of $100 million in federal stimulus money that would require the state — which ranks close to the bottom nationally in unemployment benefits — to expand unemployment benefits. He does not want to expand benefits, he said because it might eventually lead to an increase in taxes on employers.
His concern is premised on the idea that once a state increases benefits, it is tough to restrict them. While there is some validity to this concern, using the fear as a reason to refuse stimulus money would eliminate any possibility of a government-assisted escape from the worsening recession.
Obama is siding with prevalent economic thought, which subscribes to a modified Keynesian model of free-market trade cycles. The free market is best left alone until such time as it enters a downward spiral. That spiral can take us places we do not want to go, as it did in the Great Depression. Consumer demand drops, causing a drop in manufacturing, causing layoffs, causing even less consumer demand, causing less manufacturing, causing… You get the idea. The Keynesian view is that the best way to interrupt this cycle is through massive governmental expenditures.
Under this approach, government demand replaces lost consumer demand until manufacturing responds. Manufacturers hire more employees, who then have money to spend, which increases consumer demand. Manufacturing picks up even more, leading to higher employment levels, causing more consumer demand… Again, you get the idea. Most economists agree that is what finally pulled us out of the depression, partly as a result of policy and partly due to WWII.
The Keynesian approach is a short-term one designed to reverse the downward trade spirals that a free market occasionally enters. Increased unemployment compensation fits well with the approach because it keeps their consumer demand from dropping to zero. It also, by the way, keeps the unemployed from starving.
Riley’s rationale for rejecting more federal unemployment dollars would, if adopted by others, guarantee the failure of our only plan for avoiding a repeat of the 1930s. Yes, government spending increases taxes. It always will. Obama’s hope is that a short-term stimulus will reverse the downward spiral, and that we can pay off the additional debt as the economy begins heading north.
“It is certain that the world will not much longer tolerate the unemployment which, apart from brief intervals of excitement, is associated and in my opinion, inevitably associated with present-day capitalistic individualism,” wrote Keynes in 1936. “But it may be possible by a right analysis of the problem to cure the disease whilst preserving efficiency and freedom.”
Will the plan work? Nobody knows for sure, but it’s the only realistic option on the table.