Thursday, July 28, 2011

Government Can Stimulate Demand--and Should--Rice's Baker Institute Says

The Houston Chronicle on July 24, 2011, posted an op-ed column entitled "Government can stimulate demand." The print version on July 25th carried the sub-head, "Now is not the time for fiscal prudence."

The analysis argues that the economy is in deep trouble, and there is only one entity that can help it grow:

"Consumption is an unlikely source of growth. Given high levels of unemployment and consumer debt, the household sector is not in a position to power a robust recovery. Neither is the business sector. Businesses are not going to invest without some convincing signs that expenditures by other sectors are increasing. It doesn't make sense to invest in additional capacity when there is no demand for the new output. Finally, the rest of the world is not going to bail out the U.S. economy. U.S. exports have grown a little over the past year, but with contractionary policies being pursued in many countries, including Europe and even China, exports cannot be counted on to drive the economy. Besides, if the U.S. economy does start to recover, its imports will increase, partially offsetting the stimulus effect of exports.

"That leaves the government sector."

This, of course, makes perfect sense to me. And it is something that Nobel prize-winning economist Paul Krugman has argued for years.

What is remarkable about the Houston Chronicle column is that it is authored by two scholars from the James A. Baker III Institute for Public Policy at Rice University. For scholars at a conservative Republican think tank to come to this conclusion is truly eye-opening -- and just another marker of the national Republican Party's total disconnect from fiscal and political reality.

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