HICKS: Spending, debt influence long-run growth

As the recession looms smaller in the rearview mirror, it is useful to explain a bit of what economic research says about the appropriate policy for long-term growth.

The past four or five years have exposed many Americans to a continuing debate over the role of government spending in a recession—and resurrected for them the ghosts of many long-dead economists. The two sides: Keynesians and non-Keynesians. The former believe some government intervention, primarily spending, dampened the ill effects of a recession; the latter reject that theory.

In the spirit of full disclosure, I should tell you that my doctoral dissertation was a contribution to new Keynesian economics, and much of my graduate coursework was with the leading torchbearer for John Maynard Keynes’ modern legacy. My dissertation mentors were closely aligned with the leading advocates of modern Keynesian economics, including several Nobel laureates.

It should be no surprise that I am sympathetic to the idea that the pain of a recession could be dampened by government intervention. I should point out that this is the view of a majority of economists (though a smaller number believe government is not nimble enough to act effectively, even if it could in theory). This is not an ideological position; new Keynesians have dominated the presidents’ Council of Economic Advisors for 20 years.

Neither do I reject the non-Keynesians. There is much potential in alternative views, but even some popular ideas just aren’t mature enough to test scientifically. That’s a pity.

But it is only during the depths of this type of recession (perhaps two in a lifetime) that the disagreement among economists is so sharp.  As we leave the recession, two stark truths will emerge that should lead policymakers into closer agreement. These are things almost all economists agree upon.

First, productivity gains are the only way to achieve long-run growth. This means we have to make more goods and provide more services at a lower cost. There is no other miracle, trick or shortcut to greater prosperity. It is productivity improvements alone that set the long-run growth rate.

Second, government spending and debt plays a large role in productivity growth, but with complex effects. Although fairly rare, appropriate government spending on the right type of infrastructure or education can reduce the costs of producing goods and services in an economy, the spending—and especially debt—also crowds out truly productive investments by the private sector.

By any measure, our debt is now the largest in history. That is why most economists, Keynesian or not, fear our growth will significantly slow for a generation.•

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Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.