Planning for the Next Expansion / Recession Cycle

There is widespread support for the government to pursue another round of borrowing to stimulate the economy. The theory is that the Federal Reserve has done all it can through monetary policy, so the only tool left is fiscal policy, in this case borrowing money. I agree that borrowing money can reduce the severity of this recession, but the price tag is too high.

The economy will continue its cycle of expansion and recession, and at some point in the next few years it will be producing more goods and services than it is today regardless of whether we do more stimulus. The question we have to ask is if we borrow a trillion dollars this year, will that help the economy in the long-run enough to justify the extra debt we will have. I suspect it will not. The main benefit from borrowing the money is to reduce the severity of the recession.

What we need in place of stimulus (i.e. gov’t borrowing) is to structure our economy to handle the ups and downs of the economic cycle. Any politician talking about dealing with this recession needs to talk about the plan for the next recession. Are we going to build a bunch of luxury items (i.e. 5000 sq ft houses or something like that) in the next expansion and then panic when the expansion turns to recession? It isn't hard to avoid this behavior and make the economic cycle be no big deal. Portugal has something like 60% of US per-capita GDP, and it’s not a constant crisis there. We ought to be set up to handle even a 10% drop in GDP without it causing major problems.

We’re like a flu patient who wants antibiotics (which aren’t effective against the flu) and who doesn’t want to hear that the best thing to do is to let the flu run its course and next year get the flu shot to keep this from happening again.

Don’t wait for politicians to do it. They're mostly operating under the idea that government must smooth out the economic cycle. The probably will not succeed in making the economy grow in a nice straight line, so people should have a plan for how they will respond to the next economic expansion or contraction.