Michael Hicks is director of the Center for Business and Economic Research and an associate professor of economics at Ball State University. His column appears in Indiana newspapers.
As the recession looms smaller in the rear view mirror, it is useful to explain a bit of what economic research says about the appropriate policy for long-term growth.
The past four or five years have exposed many Americans to a continuing debate over the role of government spending in a recession and resurrected for them the ghosts of many long-dead economists. Two groups exist: Keynesians and non-Keynesians. The former believe some government intervention, primarily spending, dampened the ill effects of a recession, the latter reject this approach.
In the spirit of full disclosure, my doctoral dissertation was a contribution to new Keynesian economics, and much of my graduate coursework was with the leading torchbearer for John Maynard Keynes modern legacy. My dissertation mentors were closely aligned with the leading advocates of modern Keynesian economics including several Nobel Laureates. I dislike labels, the truth is the truth whatever it is called, but it should be no surprise that I am sympathetic to the idea that the pain of a recession could be dampened by government intervention. I should point out that this is the view of a majority of economists (though a smaller number believe government is not nimble enough to act effectively, even if it could in theory). This is not an ideological position; new Keynesians have dominated the presidents' Council of Economic Advisors for 20 years.
Neither do I reject the non-Keynesians. There is much potential in alternative views, but even some very popular ideas just aren't mature enough to test scientifically. This is a pity. In a sense, new Keynesians won the recession because the policy debate was largely argued between different groups of Keynesian economists, with the others yelling from the policy sidelines.
But it is only during the depths of this type of recession (perhaps two in a lifetime), that the disagreement among economists is so sharp. As we leave the recession, two really stark truths will emerge that should lead policy makers into closer agreement. These are things almost all economists agree upon.
First, there is essentially no disagreement among economists that the only route to long-run growth is through productivity gains. This means that to grow we have to make more goods and provide more services at a lower cost. There is no other miracle, trick or route to greater prosperity. It is productivity growth alone that sets the long-run growth rate.
Second, government spending and debt plays a large role in productivity growth, but with complex effects. Appropriate government spending on the right type of infrastructure or education can reduce the costs of producing goods and services in an economy. These investments are fairly rare and not 10 percent of what politicians call investments actually are. However, this spending -- and especially debt -- also crowds-out truly productive investments by the private sector. By any measure our debt is now the largest in history. This is why most economists, Keynesian or not, fear that our enormous debt will significantly slow our growth for a generation.