Mortgaging The Future In Order To Save It
Wise words should be heeded - even here in Canada.
But mortgaging the future in order to save it has to be done wisely, with the proper accountability and strings attached - got that, dear Mr. Prime Douchebag?
But mortgaging the future in order to save it has to be done wisely, with the proper accountability and strings attached - got that, dear Mr. Prime Douchebag?
Deficits and the Future
by Paul Krugman
Right now there's intense debate about how aggressive the United States government should be in its attempts to turn the economy around. Many economists, myself included, are calling for a very large fiscal expansion to keep the economy from going into free fall. Others, however, worry about the burden that large budget deficits will place on future generations.
But the deficit worriers have it all wrong. Under current conditions, there's no trade-off between what's good in the short run and what's good for the long run; strong fiscal expansion would actually enhance the economy's long-run prospects.
The claim that budget deficits make the economy poorer in the long run is based on the belief that government borrowing "crowds out" private investment - that the government, by issuing lots of debt, drives up interest rates, which makes businesses unwilling to spend on new plant and equipment, and that this in turn reduces the economy's long-run rate of growth. Under normal circumstances there's a lot to this argument.
But circumstances right now are anything but normal. Consider what would happen next year if the Obama administration gave in to the deficit hawks and scaled back its fiscal plans.
Would this lead to lower interest rates? It certainly wouldn't lead to a reduction in short-term interest rates, which are more or less controlled by the Federal Reserve. The Fed is already keeping those rates as low as it can - virtually at zero - and won't change that policy unless it sees signs that the economy is threatening to overheat. And that doesn't seem like a realistic prospect any time soon.
What about longer-term rates? These rates, which are already at a half-century low, mainly reflect expected future short-term rates. Fiscal austerity could push them even lower - but only by creating expectations that the economy would remain deeply depressed for a long time, which would reduce, not increase, private investment.
The idea that tight fiscal policy when the economy is depressed actually reduces private investment isn't just a hypothetical argument: it's exactly what happened in two important episodes in history.
The first took place in 1937, when Franklin Roosevelt mistakenly heeded the advice of his own era's deficit worriers. He sharply reduced government spending, among other things cutting the Works Progress Administration in half, and also raised taxes. The result was a severe recession, and a steep fall in private investment.
The second episode took place 60 years later, in Japan. In 1996-97 the Japanese government tried to balance its budget, cutting spending and raising taxes. And again the recession that followed led to a steep fall in private investment.
Just to be clear, I'm not arguing that trying to reduce the budget deficit is always bad for private investment. 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.
(Keep reading ...)
by Paul Krugman
Right now there's intense debate about how aggressive the United States government should be in its attempts to turn the economy around. Many economists, myself included, are calling for a very large fiscal expansion to keep the economy from going into free fall. Others, however, worry about the burden that large budget deficits will place on future generations.
But the deficit worriers have it all wrong. Under current conditions, there's no trade-off between what's good in the short run and what's good for the long run; strong fiscal expansion would actually enhance the economy's long-run prospects.
The claim that budget deficits make the economy poorer in the long run is based on the belief that government borrowing "crowds out" private investment - that the government, by issuing lots of debt, drives up interest rates, which makes businesses unwilling to spend on new plant and equipment, and that this in turn reduces the economy's long-run rate of growth. Under normal circumstances there's a lot to this argument.
But circumstances right now are anything but normal. Consider what would happen next year if the Obama administration gave in to the deficit hawks and scaled back its fiscal plans.
Would this lead to lower interest rates? It certainly wouldn't lead to a reduction in short-term interest rates, which are more or less controlled by the Federal Reserve. The Fed is already keeping those rates as low as it can - virtually at zero - and won't change that policy unless it sees signs that the economy is threatening to overheat. And that doesn't seem like a realistic prospect any time soon.
What about longer-term rates? These rates, which are already at a half-century low, mainly reflect expected future short-term rates. Fiscal austerity could push them even lower - but only by creating expectations that the economy would remain deeply depressed for a long time, which would reduce, not increase, private investment.
The idea that tight fiscal policy when the economy is depressed actually reduces private investment isn't just a hypothetical argument: it's exactly what happened in two important episodes in history.
The first took place in 1937, when Franklin Roosevelt mistakenly heeded the advice of his own era's deficit worriers. He sharply reduced government spending, among other things cutting the Works Progress Administration in half, and also raised taxes. The result was a severe recession, and a steep fall in private investment.
The second episode took place 60 years later, in Japan. In 1996-97 the Japanese government tried to balance its budget, cutting spending and raising taxes. And again the recession that followed led to a steep fall in private investment.
Just to be clear, I'm not arguing that trying to reduce the budget deficit is always bad for private investment. 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.
(Keep reading ...)
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