In Times of War, Times of Recession (essay)

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First, we need to review some simple, basic concepts.

In a healthy, stable economy the consumers’ demand for the goods and services produced is more or less satisfied by the supply available. Prices stay more or less the same, because neither the supply nor the demand is too big or too small. When it happens that people want more goods and services than the economy is producing at that time, prices go up. The relative scarcity of goods and services makes them more valuable and makes the people willing to pay more for what they want and need. The rise in prices is called, of course, inflation.

When it happens that the economy can produce more than the people want or can afford, the goods and services become less valuable. People have less money – or are unwilling to spend enough of their money – to keep the economy going at its current level. There is more being produced than can be purchased, so those firms producing the goods and services compete more among themselves for customers; the surest way for them to compete effectively, attracting more customers than their competitors, is to lower prices. This opposite state of affairs from inflation is called recession, as prices “recede” from their former levels.

Often, either kind of these imbalances between demand and supply corrects itself in a little while: when prices go down, people become able, or willing, to buy more. At the same time, as all prices go down, producers are able to spend less on the goods and labor needed to make their products. Producers provide fewer goods and services and people buy more, until a relative balance between the supply produced and the people’s demand is again achieved.

When prices go up, people become willing or able to buy fewer goods and services than they had been, reducing demand. At the same time, the prices the producers themselves have to pay for the materials and the labor required to produce their goods and services also go up, so they cut back on the supply they are providing. These two processes continue at the same time until again a relative balance is achieved between the demand and the supply available.

However, this self-correction rather often seems not to work, at least not right away, and serious problems arise.

If people continue to have or gain more money than what producers can provide to meet rising demand, prices will continue to rise. Still more goods and services will be produced; more materials will be bought and more workers will be engaged, providing people with still more money and driving prices up still further. In this situation, it often happens that some individuals prosper less than others; sometimes many are able to afford less and less because the prices they are seeing grow higher and higher, while a few can afford to buy more and more, continuing to drive some prices - such as real estate prices - further and further upward. This is sometimes called an inflationary spiral.

On the other hand, if prices go down so steadily that small adjustments in the supply of goods and services are not enough to restore stability, producers will have to take extreme measures. Some firms will be strong enough to keep up with the falling demand by laying off more and more of their labor force and by making continuing reductions in the materials needed to provide the goods and services. They may have to stop providing some things altogether. And other, weaker firms may have to go out of business completely.

As the purchase of materials and the payrolls of workers shrink further, the suppliers and the workers have still less to spend on what they want and need. That drives prices still farther down, producing more cutbacks and more layoffs, reducing the value of people’s savings and their homes and other assets, which in turn cause still further reductions in the money available to buy, and so on. A downward spiral of this type is called a depression, which is an extreme case of recession.

In 2008, all the economies of the world – including the United States’ economy – experienced a sudden, significant recession, the effects of which promise to stay with us for a long time: high unemployment and prices not high enough to stimulate resumption of production.

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At least since the worldwide, Great Depression of the 1930s, it has been well known that national governments can intervene in the operations of the economy with beneficial results for all, in ways that are temporary and reversible. As a result of such adjustments of national governments’ fiscal policies, the economies of the world have been relatively stable and self-correcting since World War II.

The basic principles are easy to understand:

In times of inflation, relatively too much money is available in the economy for a healthy relative stability; so what is needed is a group of measures reducing the amount of money available. The actual amount of money, dollars and cents, produced by the national government can be reduced and higher interest rates can be paid for national bonds; private banks too can raise their interest rates so that people will be inclined to save more, also reducing the availability of money to drive prices up and up.

There are always schools and roads to be built, bridges to be maintained, national debts to be repaid, libraries and museums to be expanded, and in general, infrastructure to be upgraded; so another tried and true method of controlling inflation is to raise taxes, thus directly and surely reducing private demand. Finally, the need for controlling so-called “runaway” inflation creates a clear opportunity for paying down the level of national debt.

In times – like ours – times of recession, national governments can increase the supply of money entered into circulation, up to a point. They can also reduce interest rates up to a point so that more businesses can borrow what they need to keep going, thus continuing to buy materials and pay workers.

And a time of recession, or depression, is a perfect opportunity for a national government to add to its debt, borrowing new moneys so that our government can itself provide additional goods and services – like upgrading public infrastructure and the like – in order to give producers business and to pay workers wages which together cause more money to enter the marketplace and to raise demand for goods and services.

Such stimulation of the economy by government spending, stabilizing prices and putting workers back on the job, will remain temporary, in effect only to the level needed and for the time required to restore a relative balance between the supply and the demand that can be sustained within the private economy.

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In a time of war – like our own time – it is obviously necessary for a national government to spend more than in times of peace with a relatively stable economy.

To be able to do so, a national government usually increases its debt, perhaps selling war bonds to the general public as well as borrowing on the international money market. It often seems to happen that the extra money spent on the war effort does not stay within the nation’s own borders and the extra military money also tends to go to large corporations, their executives and stock-holders, rather than to the wider public who are somewhat more likely to spend it. In cases like this, the extra spending does not produce the rise in prices, the inflation, that war spending sometimes produces.

We are now at war, and at the same time we are trying to recover from the most widespread and profound recession since the 1930s. To pay for the wars (Iraq and Afghanistan), for years we have been running up our national debt. To attempt to promote a rise in the value of our labor, our goods and services, our savings and other assets, we have also increased the money supply (as much as we prudently could) and lowered interest rates just about as far as they will go; and we have done a little – not much – so-called stimulus spending in hopes of injecting temporary government money directly into the economy.

The end of the war effort is not really in sight; we will have extraordinary military expenses for at least a decade. The economy is no longer descending toward depression, but is not making much progress either.

It seems obvious that this is a time when we need to increase the national debt substantially further. The U. S. government still seems to be to the safest public investment available in the world, so we do not now seem close to an excessive debt. Another bad side effect of high national debt is sometimes inflation, but we are so far from seeing prices rise significantly that to be concerned about inflation now seems laughable.

In short, everything indicates that now is a time to look to our government to engage in a truly extraordinary level of spending, as much of it as possible right here at home. Basically, there are only two ways for governments to raise the level of money available for such spending: increasing the national debt and raising taxes.

If we are reluctant to raise the taxes paid by those relatively few individuals and corporations with extraordinary levels of revenue and accrued assets, then we must increase debt.

On the other hand, if we are reluctant to further increase the national debt, then we must raise taxes, perhaps beginning with the wealthiest individuals and corporations who can afford it most easily and whose day-to-day spending will decline less than the immediate spending of those less financially comfortable.

Facing the indefinite continuation of both our time of war and our time of recession, our government – if it is responsible – will inevitably raise its expenditures beyond current levels; this is the greater good in our time. To finance this additional spending, we should consider a modest raise in the national debt and a modest increase in the taxes on the wealthiest Americans and corporations.

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