Our economy now faces the most serious crisis since the Great Depression. The financial crisis that was triggered by the bursting of the housing bubble has now spread to the real economy, and we face a sharp downturn that is spreading across the globe. A serious recession now seems unavoidable in the United States, as well as Europe and Japan. The developing world is already struggling with financial turmoil and economic decline. For the first time since the 1930s, we face a real risk of deep worldwide economic contraction.
Restoring economic growth will require a bold, multifaceted plan. This must begin with a recovery program for Main Street – substantial fiscal expansion to revive the real economy.
With a deep and long global downturn now likely, any plan for reviving the economy should be substantial, strategic, and sustained. It should also be coordinated with simultaneous efforts across the world.
Reviving our nearly $15 trillion economy will require substantial fiscal expansion. With interest rates already low, monetary policy can provide little help. The decline in consumption brought by the collapse of housing and stock prices has already been dramatic. Now states and localities must cut spending or raise taxes to balance budgets. Exports are declining as the world economy slows.
Three percent of GDP – about $450 billion each year for two years, a total of $900 billion – should define the floor, not the ceiling, of what needs to be done.
The plan must be strategic, focused on public investment in areas vital to strengthening America’s long-term competitiveness. Public investments are far more efficient at stimulating the economy than tax cuts for individuals or businesses. The money allocated will be spent and will produce jobs here. And public investment provides a long-term return in the higher productivity of transport on modern roads and rail, the higher productivity of better-trained workers, and the new technologies spawned from higher research and development funds. Central to the plan should be investment in green technology, reducing our dependence on foreign oil, and addressing the rising threat of global warming. It must also target the states, funding vital health care and public programs so the recession is not worsened by local budget-cutting. This will also help to maintain the income of the people most likely to spend in the economy.
Finally, the recovery plan must be sustained. Two years of deficit-funded stimulus should help the economy recover. But it will take many years of fiscal expansion to move us from an economy driven by booms and busts of asset bubbles to one of sustained and balanced growth.