The (Not So) Simple Lessons.(the economy)(Brief Article)

Should the United States government be spending money to avoid a recession, particularly in the wake of the terrorist attack? The lessons from abroad would suggest, at least superficially, that the answer is a resounding "no." In Japan, 10 years and $10 trillion of fiscal pumping have had no visible impact on the economy. Growth is still below zero, unemployment is at record high levels and the banking system is essentially bankrupt. The only real "accomplishments" appear to be increasingly hysterical warnings from international debt-rating agencies that Japanese government debt is fast approaching junk status.

On the other hand, 10 years of fiscal rectitude in southern Europe have produced a stunning success. A decade ago Italy, Spain and Portugal were wallowing in government debt and paying a steep price for it. Long-term bonds were three or four times more expensive for those governments than for Germany or France, and that drove the cost of borrowing into the stratosphere for factories, stores and consumers. Then southern Europe signed on to the so-called Maastricht Treaty, paving the way for the European Union, and went on a debt diet designed to bring them into economic harmony with Germany and France. The result has been an economic boom as interest rates fell sharply and investors gained new confidence.

With that kind of evidence, fiscal rectitude looks like a no-brainer. That seems to be exactly what former Treasury secretary Robert Rubin and Alan Greenspan were telling Congress last week: higher spending means higher interest rates, and that means mortgages cost more and business loans cost more. The bottom line: you have to subtract those costs from any economic stimulus you think you're going to create by cutting taxes and spending freely.

But just a minute. The lessons may not be as obvious as they seem. Congress would be right to consider a simple point: how the money gets spent is far more important than how much gets spent. And the danger that higher spending will raise interest rates can be easily overstated. True, higher rates might choke off housing sales and home refinancing, which have been the key to keeping us out of recession in recent months. But slightly higher mortgage rates may not matter to people who are suddenly afraid of their economic future and are unlikely to buy a new house anyway. If a big, immediate tax cut (particularly to low-income workers, who are more likely to spend it) means more demand at stores and thus more jobs, it could be worth far more than a few more houses sold right now.

The lessons of Japan and southern Europe only make that case more compelling. Japanese spending has done almost nothing to help growth because it came in two main forms. First was spending on bridges to nowhere, bullet trains to sleepy ...