My intellectual mentor, the late Professor Seymour Melman of Columbia University, was very enamored of a small booklet written in 1935 called “The Chief Cause Of This And Other Depressions.” The author was Leonard P. Ayres, Vice President of the Cleveland Trust Company. This is the gist of what Ayres said, at least the way I interpret it:
A recession, or a long one, would benefit from a short-term stimulus, or if you consider two years to be medium-term, a medium-term stimulus. However, if this is a depression, you have a different animal.
The Melman/Ayres view of depressions is that they are partly or significantly caused by a collapse in the capital goods industries. That is, the machinery and such that is used to make other stuff loses their markets. When these industries start to collapse, the unemployment there causes a greater lack of demand among the consumer goods industries, starting a snowballing effect in the wider economy.
The implication, at least for Melman and I, was that in a depression, you should try to revive, not just the consumer goods industries, but the producer, or capital goods industries as well. That means saving the Big 3, for instance, because they use a lot of capital goods. But it could also mean building lots of trains, because trains use lots of capital goods. In addition, according to WTO rules, the only way you can demand "domestic content", that is, demand that what the government subsidizes is actually produced in this country, is if the government is buying "basic infrastructure", which again, means trains.
So therefore the horizon for a stimulus should be, not two years as has been bandied about, but at least five years, and that opens the door to many more long-term projects, perhaps even including the national electric grid and things like wind farms, that would help lift the capital goods industries out of the muck, and then the rest of the economy.
What do you think?