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Recession Economics - How Do We Repay the Stimulus Spree?

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By Michael Kinsley
Friday, February 20, 2009

In January, Suze Orman, the blonde financial adviser who's all over TV telling you to cut up your credit cards, went on "Oprah" to discuss how to cope with the recession. Orman recommended not eating in restaurants for a month. The appalled National Restaurant Association pointed out that if every "Oprah" watcher took this advice, it would cost 53,000 jobs.

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But what are we supposed to do? Hoard our pennies, or spend them? For decades we've been told -- correctly -- that we're a profligate people with a profligate government, all living beyond our means. Some day, they said (okay, okay, I, among many others, said) that we would pay for all this profligacy. Now the black day has arrived, and we're told that the best way out of this mess is for the government to shovel money out the door even faster than before, with preference given to projects that can spend it as quickly as possible.

There has been less emphasis on what we, as individuals, should do. President Obama ducked the question at his news conference last week. But logic suggests that we should be gluing those credit cards back together. The government is actually going to pay us to buy a new house or car. Borrow and spend, borrow and spend is what got us into this mess. Apparently, borrow and spend will get us out of it.

It sounds too good to be true, but it is true. By now we all know about the "paradox of thrift": If everyone stops spending because times are bad, times get even worse. An economist writing in the New York Times the other day addressed the wonderfully inverted problem of people who feel guilty about not spending enough. His advice: Don't feel guilty about saving money, because it's the government's job, not yours, to make sure that we spend enough. But what if you don't feel guilty about reckless borrowing and spending? What if you actually enjoy it? This has been a more common attitude in recent years. Is it still okay? Or does the medicine have to taste bad to be any good?

And can we rely on the government to spend enough? This also seems like a wonderfully upside-down problem. The answer is, apparently not. We're going to need a second stimulus package, probably a third chapter of the bank bailout, more for the auto industry and others. It's all going to cost at least two or three trillion. If it works, it will be money well spent. If it doesn't work, that means we should have spent more.

Trouble is, money well spent is still money spent. The reasons that made it a bad idea to run up all that debt haven't disappeared just because something even worse came along. Almost no one in Washington is talking about this. Since 1981, Republicans have run up massive deficits and Democrats have discovered fiscal responsibility. Now they're all having too much fun reverting to type. Republicans reject the Keynesian premise that the money is being well spent because it is being spent. Too zen for them, or something. For some Democrats, meanwhile, the very fact that a program is costly has magically become an argument in its favor.

But even if the stimulus is a magnificent success, the money still has to be paid back. The plan of record apparently is that we keep borrowing, spending and stimulating, faster and faster, until suddenly, on some signal from heaven or Timothy Geithner, we all stop spending and start saving in recordbreaking amounts. Oh sure, that will work.

There is another way. If it's not the actual, secret plan, it will be an overwhelming temptation: Don't pay the money back. So far, even as one piggy bank after another astounds us with its emptiness, there have been only the faintest whispers about the possibility of an actual default by the U.S. government. Somewhat louder whispers can be heard, though, about the gradual default known as inflation. Just three or four years of currency erosion at, say, 10 percent a year would slice the real value of our debt -- public and private, U.S. bonds and jumbo mortgages -- in half.

Anyone who regards the prospect of double-digit inflation with insouciance is either too young to have lived through it the last time (the late 1970s) or too old to remember. Among other problems, inflation works only as a surprise or betrayal. It can never be part of any public, official plan. Plan for 10 percent inflation, and you'll get 20. Plan for 20 and you'll need a wheelbarrow to pay for your morning Starbucks. But if that's not the plan, what is?

Michael Kinsley is resuming a weekly column in The Post. His e-mail address is kinsleym@washpost.com.


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