The case for more government spending

October 21, 2010, 11:29 PM UTC

The Obama administration has been criticized for failing to create many new jobs with its $862 billion stimulus package. So why are economists calling for another round of stimulus dollars?

To spend or not to spend? That’s the question.

And similar to William Shakespeare’s opening line of an act in Hamlet, there is no easy answer.

In the same week the British government unveiled its biggest spending cuts in 60 years, some of America’s most influential economists and Coca-Cola CEO Muhtar Kent say the U.S. government needs to spend more money to stimulate the economy until unemployment drops from the current 9.6% to pre-recession levels of around 6%.

The economists Robert Solow and Benjamin Friedman hinted this isn’t the time to worry too much about the nation’s debt, which US Treasury Department estimates is 93% of GDP this year and is expected to rise to 102% by 2015. Instead, they trumpet fiscal expansion in the form of more spending – in particular, investments in infrastructure projects spanning everything from construction and maintenance of roads, bridges and the like. All of this has the intended effect of creating jobs.

“I think the British government could worsen their situation [by cutting spending],” says Solow, who gave a talk with Harvard University’s Friedman on Thursday hosted by the American Academy of Arts and Sciences.

Solow, who won the Nobel Prize in 1987 for his analysis on economic growth, criticized the Obama administration’s $862 fiscal stimulus package: “As a job creation measure it was zilch.” Although a portion of the package was earmarked for infrastructure spending, many critics have said too much of it ended up plugging state and local budget shortfalls.

Friedman and Solow aren’t really saying anything that others haven’t argued. Earlier this week, even Coca-Cola’s (KO) Muhtar backed further U.S. stimulus spending as the company reported $2.06 billion in net income for the third quarter, up 8% from the $1.9 billion the previous year.

“In the US, the consumer is still confused; there’s still high unemployment and companies continue to deleverage,” Kent told The Financial Times. He added that government “is the only entity that can borrow and should borrow and support and generate incentives for innovation and entrepreneurial spirit.”

What’s worth noting here isn’t so much what’s being said but rather the timing of it. Many economists and CEOs are debating the merits of another round of quantitative easing by the Federal Reserve, which is expected to announce more details when it meets in early November. The push for more stimulus in America also comes as the arguably fiscally liberal Brits say more spending would lead to “economic ruin.”

“Today is the day when Britain steps back from the brink,” George Osborne, Britain’s top finance minister told the House of Commons as it unveiled steep spending cuts on Thursday that include everything from curtailing welfare benefits to eliminating hundreds of government jobs in efforts to reduce the huge budget deficit. “To back down now and abandon our plans would be the road to economic ruin.”

So what will really lead us to economic ruin?

Spending or not spending. That’s the question.

See also:

The ugly reality of lowering debt by default

The real fix for the economy: Saving

Five ideas to stimulate the economy