You Can Spend Your Way Out of a Recession

by: Bob McTeer

“You can’t spend your way out of recession” is a sound bite heard almost every day on financial TV. Recently a guest commentator combined that sound bite with this one: “You can’t borrow your way out of debt.” Perhaps the second one was intended to divert our attention from the first one. Clever. Perhaps too clever by half.

Of course you can spend your way out of recession, almost by definition. A recession can be defined as a shrinkage of spending and income. More spending is needed to generate more income. Therefore, more spending will do the job.

I think the problem is that spending your way out of a recession is the message of Keynes’s “General Theory of Employment Interest and Money, and people don’t want to be labeled a “Keynesian.” But surely one can cling to his classical economic principles while acknowledging that Keynes had a point, especially during recessions.

In a recession, income declines because spending declines, and spending declines because income declines. It’s a vicious circle that needs to be broken. One option might be tax cuts to increase business spending. Another might be lower interest rates to stimulate spending. Another is to have government spending make up the slack. That will work if it has monetary policy support, i.e. if the government spends newly created money so it doesn’t crowd out private spending.

I don’t necessarily want to be labeled a Keynesian either, but I see no reason to fear acknowledging that he had a point. To say that we can’t spend our way out of a recession may make a good sound bite, but it has no credibility.