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A Friendly Financial Intervention

There are times when excessive government spending can be a drag on the economy, but now is clearly not that time. In case anyone missed it, the private economy has collapsed. It has been shedding jobs at the rate of more than 600,000 a month for the last six months. There are absolutely no signs this decline is about to turn around any time soon.

In this context, President Obama’s recovery package is providing essential support to the economy. Although signed into law only three months ago, it has already provided a boost to the economy by preventing tens of thousands of layoffs by state and local governments. These governments would have been forced to dismiss teachers, firefighters, and other workers due to plunging tax revenue. While many governments are still making cutbacks, the number of jobs lost is much smaller than it would have been without the stimulus.

In the months ahead, millions of jobs will be directly and indirectly created as the stimulus spending starts to percolate through the economy. Workers will be hired to repair roads, retrofit buildings, modernize the electric grid, and perform hundreds of other tasks paid for by the stimulus. These workers will then spend their paychecks on their mortgages, at retail stores, at restaurants, and in other places, generating new demand and creating more jobs.

Would the private sector somehow be creating more jobs if the government was not employing workers rebuilding our infrastructure? Are there factories that would have hired workers but chose not to because the government is repairing the roads? Did restaurants cancel plans for expansions because the government is keeping teachers employed?

That story does not make sense. We need the government to support the economy right now. We would have many fewer jobs without the boost to government spending.

DEAN BAKER is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy.

This story originally appeared in Business Week.

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Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC. 

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