Spending for Growth

One of the great disappointments of recent decades is that Democrats have more or less swallowed whole the underlying economic theories of their Republican rivals. They are now as fearful of government spending and taxes as their counterparts, and they have no economic theory to justify their social programs. To the contrary, many now agree that social programs are invariably a cost to the economy because they reduce growth by sucking funds from private capital markets. What makes Democrats different is that some argue that they are a cost the nation should gladly bear.

In fact, an analysis of why economies grow that is less ideological and truer to history yields a different attitude toward public policy. The strength of internal demand--that is, the home markets for goods and services--is a central source of economic growth, and has been at least since the Middle Ages. And good social programs ultimately help modern economies grow by keeping domestic markets strong.

I am not merely talking about Keynesian stimulus here, which is at last making a comeback. In order to keep the recession from worsening, we should be extending unemployment insurance, channeling money to cash-strapped cities and states and giving a tax cut to middle- and lower-income workers by rescinding the Bush tax cuts for the rich. But more important for the long run, it is again time to understand that high wages and more equal incomes can help the nation grow over time. Social programs--from the minimum wage to earned-income tax credits to the public investment that supports transportation infrastructure, educational equality and high-quality childcare--can be central to economic growth as well as to social justice.

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