Today the Obama Administration floated an idea for reining in the deficit by proposing to freeze some parts of government spending for three years. Both the White House and some of the economics profession of late though have been focusing on the wrong question. Their focus has been on how much to spend rather than what we should be spending on.
Perhaps it's due to a renewed interest in Keynesian economics in the wake of the financial crisis but we've actually come a long way in our understanding that Keynes was only partly right. While Keynes was concerned about stimulus in the short term, something summed up in his famous quote, "in the long run we are all dead," we now understand that what the government spends on in the short term has an important impact on the long term. In other words, the key to making the most out of short term spending is to spend on things that will continue to payoff long into the future.
That's something that the American public intuitively understands. It should come as no surprise to anyone that there's a return to fiscal austerity among independent voters. When the public has watched the federal Government hand out $4 trillion to banks (and promise an incredible total of $12 trillion) with little regard to where that money goes, it's no wonder there's a backlash against government spending. But it's more than that. What company or individual runs a budget by saying hmm, I think I should spend more this year. The focus is, and should be, on what it is useful to spend money on.
Until economists and government start focusing on what spending really is worth it, not just in the short term but in the long term too, don't expect the voting public to get on board.
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