Wednesday, October 15, 2008

Fiscal crisis vs. recession

  1. A fiscal crisis is when the government is too much in debt. The solution is for the government to increase revenue by raising taxes or to reduce spending.
  2. A recession is where there is a general slowdown of economic activity. Generally, the solution is for the government to spend money or lower taxes in such a way as to get economic activity going again.
McCain should learn the difference. Yes, we have too much debt, thanks to Bush and his wars and irresponsible spending by Congress (which was Republican for most of the time in question, though Democrats didn't do enough to stop it). But that's not the immediate potential disaster. The potential disaster is a painful world-wide recession.

(This is only part of the picture: the reason there's looming recession is that there's a credit crisis which was triggered by a solvency crisis which was triggered by a bunch of bets going bad because a bunch of assets lost their value (and people don't know by how much) which was triggered by a bunch of people getting their houses foreclosed on which was triggered by the popping of the housing bubble.)

Anyway, when the threat of recession looms, the last thing you want to do is McCain's proposed spending freeze. That just makes things worse, possibly turning a recession into a depression. That's what Hoover did in the early 20th century, and the results were very very bad. (I'm not sure how much Hoover is actually responsible, but he's come to represent "bad response to recession" in economic folklore.)

The idea is that when times are bad, the government should borrow and spend to stimulate the economy (and do so in a way that actually stimulates the economy, rather than enriching one's crony's or engaging in occupations that have little intrinsic benefit). When times are good, the debt should be paid off.

The problem is that when times were better in 2000-2008, Bush and Congress borrowed a lot of money anyway and spent it in ways that weren't particularly beneficial to the economy. That gives us less freedom to spend our way out of the current looming disaster. Yet another reason why Bush and the Republicans sucked, and the Democrats needed to do a better job of opposing them.

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