Surely most people would agree that a downsizing of the financial-services industry is in order, both in terms of the number of people who work in it and the amount they're paid. That adjustment is well underway, as New York officials acknowledged last week in predicting a sharp drop this year in Wall Street bonuses. Does anyone really think that the government should try to stimulate the economy in an effort to delay or prevent such an adjustment?
It wasn’t just finance and homebuilding and government that over-expanded during the bubble and are now in the process of right-sizing. The list also includes travel and leisure, retailing, health care and commercial real estate development. Does it make sense for the government to keep extending tax cuts in an effort to resurrect jobs in those sectors that will inevitably disappear when the stimulus ends?
The fact that employment, income, profits and confidence are all moving in the right direction means two things.
First, it means that fiscal and monetary stimulus succeeded in stabilizing the economy and financial markets. To say that they failed, or that they were unnecessary, is ideological nonsense.
The positive economic news also means that the economy is in the process of shifting workers and capital to new and more productive sectors and companies. At this point in the recovery, the focus of public policy ought to be on supporting and accelerating that process, not on trying to delay and thwart it with more stimulus.
One way for government to support it would be to get its own finances in order. This is not mindless austerity, as some would have you believe. It is the restructuring and right-sizing of the public sector that, as a practical political matter, only happens when the fiscal pressure is on. It can easily be phased in without throwing the economy into recession.
At the same time, government can accelerate the economic restructuring by stepping up its investments. These include investments in infrastructures such as roads, bridges, transit systems, electric grids and air traffic control systems. They also include investments in the education and training of more engineers, scientists and technical workers needed for a more high-tech, export-oriented economy.
Such investments have large and proven long-term payoffs. And, as any business executive will tell you, the perfect time to make them is when the cost of borrowing is at an all-time low and there are lots of unemployed Americans eager for the work and the training. The fact that Republicans can no longer recognize the distinction between such productive investments and other forms of deficit spending tells you how unbusiness-like their economic policies have become.
The choice we are presented between more stimulus and more budget-cutting is a false one. At this point in the recovery, the right policy is to cut and invest, while having the patience and humility to allow the economy to continue putting itself back into balance.