The USA can reduce budget deficit and use Keynesian stimulus at the same time
The budget of the United States is so bloated with give-aways to the wealthy, subsidies of dirty, obsolete industries, waste and inefficiency that it could be brought into balance rapidly while still increasing both investment in infrastructure and the kind of economic stimulus Keynes showed will boost economies out of recession.
Keynsian stimulus is a simple idea based on the observation that people who are working create wealth - they don’t just move it around. If the government buys things and pays people to make things or to do other work or just gives unemployed people a living wage, their economic activity can create wealth. The government pays me to get my house insulated, I pay you to do the work, you hire laborers and buy equipment and supplies, your employees buy things from local stores which hire salesclerks, and so on. If this is done well, there is a multiplier - each dollar of government spending generates multiple dollars of economic activity. And so when the government eventually reduces spending, the economy has a running start and keeps going along. Your home insulating business is chugging along, your employees are consuming goods and producing home improvements and so on. People were not just taking in each other’s laundry, they were building businesses, educating kids, inventing new products, and so on
Keynes particularly advocated this program during a recession when the economy is in a downward spiral. As businesses fail, their ex-employees and suppliers and bankers all suffer and cut back on their spending which causes more business failures and lower government tax collections and so on. When the Great Depression started, Keynes was not widely respected by economists and politicians. So they tried austerity - the government cut back on spending and the theory was that things would eventually reset themselves. That did not work out so well. The economy got stuck in reverse and got worse and worse until FDR came into office and started spending. Government spending immediately stopped the fall and began revving up the economy. Keynes theory worked, the austerity theory did not.The same thing has happened in our time. The Europeans have tried austerity and are mired in recession, poverty, and increasing social unrest. The US tried stimulus and the economy recovered. There’s not really room for debate: Keynsian stimulus works and austerity hurts the economy. But as with FDR, because of political opposition, the current US government has not been able to spend enough on stimulus to boost the economy into full speed. FDR had to wait until the war started to boost spending high enough, but we do not. In fact, we don’t even have to increase government spending.
If you oversimplify what Keynes argued, you end up only thinking about total government spending. But Keynes never argued that just having the government spend money was stimulative - he argued for government spending that put money in the pockets of consumers and that otherwise increased domestic demand. Keynesian stimulus is government spending with a multiplier, but a lot of government spending has no multiplier. For example, the US government spends $200/gallon to get gasoline to soldiers in Afghanistan. That money does nothing for the US domestic economy - it just increases the debt. The government spends $7,000,000,000 (seven BILLION) dollars a year to buy crop insurance for mostly big corporate farmers. Suppose the government let farmers buy their own insurance and let insurance companies sell insurance without government welfare, and took half that money to hire teachers. At $50,000 for teachers (salary plus overhead), we could hire 70,000 teachers and scatter them across the country. Those teachers would rent apartments/buy houses, purchase goods, pay local taxes, save money in local banks, and also - by the way - teach our kids. That is, we could reduce government spending by $3 1/2 billion each year while increasing government stimulus of the economy and investing in the future via education. Why don’t we do it? Big corporate farm interests have better lobbyists than school teachers. Pure and simple.
Or consider all the tax expenditures in the budget - because someone has to pay for tax breaks. Bowles-Simpson estimated tax breaks like carried interest exemption that let Mitt Romney pay 15 % tax rates cost the rest of us over $1,000,000,000,000 (one TRILLION dollars) a year. If that money went into pockets of ordinary people instead of into Caribbean gangster banks, it would create a lot of domestic demand and lift the economy. Same with money budgeted to be spent on the Iraq and Afghan wars or on oil subsidies or to reduce the cost of executive jets or waste in Medicare or …
The bottom line is we can increase government stimulus of the economy, as Keynes proposed, while reducing total government spending because way too much of the Federal budget is corporate welfare.