Spend your way out of a recession?

Not sure if I would buy into the theory if spending your way out of a recession, but certainly Richard Koo, the chief economist for Japan’s Nomura Research Institute, would like you to.  His theory posits that Japan was able to maintain its current economic position in the world by spending during its 1990s bubble crisis.  Interesting theory.  Indeed, if money does keep flowing when all private groups have turned off the tap, there is still some stimulus to be had in the system.  Now, I’m not an economist, so I have no idea whether this idea would work or not.  Just pointing out for being very different.

He says that as soon as he takes office, U.S. president-elect Barack Obama should tell the American people they are in an unusual crisis – balance-sheet recessions happen only once every few decades – and announce a massive fiscal stimulus package.

It doesn’t matter much where he directs the money. “Fix the freeway system in the Los Angeles area. There is no dearth of projects you can spend money on,” he says.

The point is to keep the money flowing and not to let up. Japan let up twice during its downturn, after becoming alarmed at its rising debt and trying to cut the budget deficit. The result, Mr. Koo says, was to set back the recovery while actually hurting the country’s fiscal position when a slower economy cut into tax revenues.

Mr. Koo also argues that governments should focus on spending rather than tax cuts, because in a downturn such as this, households may simply take their tax cut money and apply it to debt, worsening the balance-sheet recession problem.

Mr. Koo admits not everyone buys his theory. When he pushed it in the thick of Japan’s downturn, “everyone was against me. Now the number has shrunk to a very few.”

Well, if infrastructure spending is to happen during this time of recession internationally, we can only hope that it will be more sustainable infrastructure.  Al Gore a couple weeks ago in the New York Times called for more spending on infrastructure and other sustainability projects.

Economists across the spectrum — including Martin Feldstein and Lawrence Summers — agree that large and rapid investments in a jobs-intensive infrastructure initiative is the best way to revive our economy in a quick and sustainable way. Many also agree that our economy will fall behind if we continue spending hundreds of billions of dollars on foreign oil every year. Moreover, national security experts in both parties agree that we face a dangerous strategic vulnerability if the world suddenly loses access to Middle Eastern oil.

So some big minds in the world are certainly pointing to more infrastructure spending.  Even Gordon Campbell is hoping that Ottawa will help to fast-track projects in this province.  Obviously, I would like to see the Gateway Freeway Projects trimmed back by not twinning the Port Mann and not building the South Fraser Perimter Road.

Good, sustainable projects would be investments in public transit like light rail for South of the Fraser communitites, investments in better intercity travel like more trains and railroad infrastructure, and investments in alternative energies like wind turbines in certain areas of BC.  These are the kind of projects that could stimulate the economy and give BC an edge in having an infrastructure that will function more independently of fossil fuels than our current system.

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