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When the private sector has made a mess of things and is justly afraid to invest their own money in the environment that their actions has created there are two options:

  1. Wait until things sort themselves out. If the economy goes into a debt-deflation spiral this might take a long while and result in a collapsed society.

  2. The government can spend directly on projects that will provide a return on the investment. Just now that would be renewable energy and electric rail transport in the USA, but green transport friendly affordable housing would also qualify. Almost anything useful would qualify, but why not concentrate on the most important needs? Capital spending projects do actually stimulate the economy as work is being done on things that do not result in immediate consumption. That increases demand for consumption goods. This is more helpful if your economy actually produces consumer goods -- a bit of a problem in the USA, but it is still helpful.

Numerous studies have shown that such government intervention is less costly in the long run than doing nothing, especially when there are social programs such as unemployment insurance that increases during recessions -- i.e. when the private sector has messed things up.

Just now the private sector has created what is probably a bigger mess than was created after the Crash of '29, so the intervention should be larger. It is not that such deficit spending is a good in and of itself, it is that it is far superior to doing nothing. Even better would be a re-regulation of finance to insure against a repeat of this calamity.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Oct 9th, 2010 at 01:20:18 AM EST
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