HOW WE LEARNED TO STOP WORRYING AND LOVE DEFICIT SPENDING…. The federal government’s annual budget deficit is poised to hit $1 trillion, about the double the previous record. Paul Krugman explains today that Barack Obama really shouldn’t care about addressing this anytime soon, and in fact, should plan on making the deficit much bigger.
By now, the arguments should be pretty routine. To help spur economic growth, we’re going to need new government spending — a lot of government spending. The stimulus will be expensive, and make the deficit soar, and there may be some who worry about placing additional burdens of future generations through fiscal irresponsibility.
Krugman argues, persuasively, that the “deficit worriers have it all wrong.” While under normal circumstances, there’s a threat that excessive deficits can “crowd out” private investment, raise interest rates, and reduce the long-run rate of growth, these aren’t normal circumstances.
You can make a reasonable case that Bill Clinton’s fiscal restraint in the 1990s helped fuel the great U.S. investment boom of that decade, which in turn helped cause a resurgence in productivity growth.
What made fiscal austerity such a bad idea both in Roosevelt’s America and in 1990s Japan were special circumstances: in both cases the government pulled back in the face of a liquidity trap, a situation in which the monetary authority had cut interest rates as far as it could, yet the economy was still operating far below capacity.
And we’re in the same kind of trap today — which is why deficit worries are misplaced.
To be fair, I haven’t heard too much in the way of complaints from deficit hawks lately. At this point, even the Concord Coalition agrees that stimulus-created deficits are entirely necessary. The only meaningful gripes are coming from congressional Republicans, who oppose increased government spending on principle, even if it helps prevent financial ruin.
But Krugman’s point is still well taken. Invest now, stimulate the economy, and spend freely on infrastructure and public investment that will benefit the country now and in the future. Interest rates are already at rock bottom, which means it’s a non-issue for the foreseeable future.
We can worry about the shortfall after the crisis.