Spend now, while the economy remains depressed; save later, once it has recovered. How hard is that to understand?
Very hard, if the current state of political debate is any indication. All around the world, politicians seem determined to do the reverse. They’re eager to shortchange the economy when it needs help, even as they balk at dealing with long-run budget problems. ...Paul Krugman
Quite apart from greed, desperate "faith" lies at the bottom of Republican view of the economy. Stuck in a Reagan rut, they'd rather do serious harm to a large percentage of the population and the economy than admit their heroes have feet of clay.
We may be forced to watch this scenario if a Republican majority takes over Congress after November. Krugman tries once again to explain why yielding to their stubborn pride could push the economy over the edge.
He refers to projections from the Congressional Budget Office, an office in which there is no political majority to skew the results. (CBO forecasts have been pretty good over the years, with a somewhat conservative bias -- slightly underestimating GDP growth.) As Krugman points out, the CBO is currently predicting "that economic recovery will reduce the annual budget deficit from about 10 percent of G.D.P. this year to about 4 percent of G.D.P. in 2014."
That's fine, except government borrowing 'way exceeds that 4% figure, leaving us with the prospect of a serious and damaging long-term deficit.
Dealing with this problem will require, first and foremost, a real effort to bring health costs under control — without that, nothing will work. It will also require finding additional revenues and/or spending cuts. As an economic matter, this shouldn’t be hard — in particular, a modest value-added tax, say at a 5 percent rate, would go a long way toward closing the gap, while leaving overall U.S. taxes among the lowest in the advanced world.
But if we need to raise taxes and cut spending eventually, shouldn’t we start now? No, we shouldn’t.
Right now, we have a severely depressed economy — and that depressed economy is inflicting long-run damage. Every year that goes by with extremely high unemployment increases the chance that many of the long-term unemployed will never come back to the work force, and become a permanent underclass. So we need to spend to get people back in jobs, make sure recent graduates aren't slipping sideways and downward.
"Penny-pinching" now is foolish. But it has to happen sooner rather than later. When?
The answer is that the budget deficit should become a priority when, and only when, the Federal Reserve has regained some traction over the economy, so that it can offset the negative effects of tax increases and spending cuts by reducing interest rates.
Currently, the Fed can’t do that, because the interest rates it can control are near zero, and can’t go any lower. Eventually, however, as unemployment falls — probably when it goes below 7 percent or less — the Fed will want to raise rates to head off possible inflation. At that point we can make a deal: the government starts cutting back, and the Fed holds off on rate hikes so that these cutbacks don’t tip the economy back into a slump.
But the time for such a deal is a long way off — probably two years or more. The responsible thing, then, is to spend now, while planning to save later.
Krugman's specifics are reassuring -- we've had no such specifics from the other side. Then, too, Krugman is more polite to conservatives than many of us are at this point. He believes that many of them mean well. I think most of the time they're operating according to the "capital for me but not for you" economic plan.
Some of the most vocal deficit scolds in Congress are working hard to reduce taxes for the handful of lucky Americans who are heirs to multimillion-dollar estates. This would do nothing for the economy now, but it would reduce revenues by billions of dollars a year, permanently.
But some politicians must be sincere about being fiscally responsible. And to them I say, please get your timing right. Yes, we need to fix our long-run budget problems — but not by refusing to help our economy in its hour of need.
Imagine you are parents of several children and you have a budget you stick to. That's the only way you're going to make sure all the kids have the opportunity to go to college. Now one child is ill, seriously ill. What's needed is a packet of your savings to save his life.
One parent says, "Spend it. Once he's okay, we can get back on track. We've been good at saving. We can save again once the child is healthy." But the other parent argues, "No, that's not fair to the other three." Worse, that parent has always favored the oldest child. He'd sooner lose the youngest than deprive the oldest of a chance at the good life and, of course, the prospect of being living proof of his parents' social worth -- their ability to create and horde capital.
I'm not as temperate as Krugman. There are people who are so coldly wedded to a theory -- like "trickle down" -- that they'll watch the bodies pile up rather than offer help. They'd defend the flat earth theory or "smoking is good for you" rather than back down.
There's a streak of resentful loser in pretty much all Republican declarations these days. Here is an entire party which, even when it wins, feels excluded, maligned and unpopular. That's the atmosphere that breeds bullies and political extremism.
Wait, isn't that what we've been watching for over twenty years? That and "I have all the toys. Why aren't I happy?"
