Stimulus strategy has proven more effective than austerity

To the Daily Sun,

The author of a recent letter states that political leaders have failed to explain the recent "economic downturn." I think they have.

The primary cause was the popping of the housing bubble. For a variety of reasons, our housing market had become a house of cards that depended on a belief that housing values would continue to rise forever. When that growth inevitably stopped, the house of cards collapsed. Homeowners lost much of their wealth which caused consumer spending to screech to a halt. Credit dried up almost overnight and enterprises that relied on that credit to pay for materials and labor while they waited for their goods to sell were unable to meet their costs. The over-extended banks and insurance companies that had bet on the continued inflation in housing prices to support their loans began, with the collapse of Lehman Brothers, to fall apart. To stop the bleeding, Congress passed the American Recovery and Reinvestment Act — or Obama's stimulus.

The theory supporting the stimulus came from economist John Maynard Keynes (pronounced "Canes" for some reason) who proposed that "during recessions, the government should offset the decrease in private spending with an increase in public spending in order to save jobs and stop further economic deterioration." Keynesians claim that government's role is to stimulate demand (get people to buy stuff which they can't do if they don't have money) when there isn't enough demand — which is what happens during a recession or depression when the economy shrinks. Interestingly, both parties had stimulus plans in 2008. Mitt Romney, in a New York Times interview, proposed a $250 billion stimulus plan and President George Bush proposed a smaller stimulus of $145 billion.

Obama's stimulus has worked according to a Council of Economic Advisers report, whose conclusions were affirmed by the nonpartisan Congressional Budget Office and others. It prevented a double dip recession and, in combination with other stimulating measures including the Federal Reserve Bank's Quantitative Easing program (a way of injecting money into the economy), jump-started a return to job growth and has supported continued economic improvement.

According to a report in business and finance magazine Forbes, "President Obama's job creation kept unemployment from peaking at as high a level as President Reagan, and promoted people into the workforce faster than President Reagan."

That's not to say the economy is great or back to where it should be. But we are doing better than countries who followed the austerity path which involved cutting spending. The Economist Magazine (which has a business point of view) has reported that in a comparison of countries whose governments followed a stimulus approach and those that went with austerity - "austerity crimped growth." Keynes said it best, "The time for austerity is the boom not the bust."

Dave Pollak

Laconia