What Saved Us? WSJ: Self-Correcting, Monetarism; vs. Keynesian Krugman: Big Government, Fiscalism

WALL STREET JOURNAL -- The larger story here is that the economy’s natural healing tendencies are asserting themselves. Banks are writing down bad loans, raising new capital, and in general cleaning up their balance sheets. Having reduced their inventories to the nub, manufacturers are looking to increase production at the first sign of demand. Households have also been improving their balance sheets by saving more. The rush to exploit the federal “cash for clunkers” car-purchase subsidy testifies that consumers have money that they will spend when they conclude that their jobs are safe and they have some financial breathing room.

Aiding all of this has been the unprecedented monetary stimulus provided by the Federal Reserve, pushing liquidity that has helped to revive the credit and stocks markets. The $800 billion Obama spending stimulus has by definition been a bit player, since only a little more than 10% of it has even been spent. We’d be better off recalling the money.

PAUL KRUGMAN -- So it seems that we aren’t going to have a second Great Depression after all. What saved us? The answer, basically, is Big Government.

Probably the most important aspect of the government’s role in this crisis isn’t what it has done, but what it hasn’t done: unlike the private sector, the federal government hasn’t slashed spending as its income has fallen. (State and local governments are a different story.) Tax receipts are way down, but Social Security checks are still going out; Medicare is still covering hospital bills; federal employees, from judges to park rangers to soldiers, are still being paid.

In addition to having this “automatic” stabilizing effect, the government has stepped in to rescue the financial sector. You can argue (and I would) that the bailouts of financial firms could and should have been handled better, that taxpayers have paid too much and received too little.

Last and probably least, but by no means trivial, have been the deliberate efforts of the government to pump up the economy. From the beginning, I argued that the American Recovery and Reinvestment Act, a k a the Obama stimulus plan, was too small. Nonetheless, reasonable estimates suggest that around a million more Americans are working now than would have been employed without that plan — a number that will grow over time — and that the stimulus has played a significant role in pulling the economy out of its free fall.

All in all, then, the government has played a crucial stabilizing role in this economic crisis. Ronald Reagan was wrong: sometimes the private sector is the problem, and government is the solution.

Originally posted at Carpe Diem.