How I learned to stop worrying and love the deficit

Notwithstanding the neo-Hooverite talk from stimulus-program opponents, the current deficit isn’t too large. If anything, it may need to be even larger to revive the economy.

The government, in its efforts to stimulate the economy and fight a deepening recession, is doing what to many people seems counterintuitive – increasing spending and putting our country further in debt.

I’m admittedly no economic expert, and I have to resort to reading and listening to those who are. There are plenty of non-experts giving their opinions here at OneUtah and elsewhere. And opinions are like . . . well I won’t go there. But there is a great deal of hysteria without serious economic understanding when it comes to the deficit. So when I read the article, I felt it important to share here.

NY Times:

The good news is that there is little disagreement among economists who have studied the issue. The consensus is that short-run deficits help end recessions, and that whether long-run deficits matter depends entirely on how government spends the borrowed money. If failure to borrow meant forgoing productive investments, bigger long-run deficits would actually be better than smaller ones.

In 1929, President Herbert Hoover thought that the best response to a collapsing economy was to balance the federal budget. With incomes and tax receipts falling sharply, that meant cutting federal spending. But as almost all economists now recognize, President Hoover was profoundly mistaken.

When a downturn throws people out of work, they spend less, causing still others to be thrown out of work, and so on, in a downward spiral. Failure to use short-run deficits to stimulate spending amplifies that spiral, causing further declines in tax receipts and even bigger deficits. That this path makes no sense is a settled issue.

It turns out, though there is deficit spending and then again there is deficit spending. It does matter how the money is spent.

The main issue is what we do with the borrowed money.
If we simply use the money to buy bigger houses and cars, deficits make us unambiguously worse off in the long run. That’s why the explosive increase in the national debt during the Bush administration was a grave misstep.

Trillions of dollars, many of them borrowed from China, financed tax cuts for the wealthy, who spent much of their added wealth on things like bigger mansions. But beyond a certain point, when everyone builds bigger, the primary effect is merely to raise the bar that defines the size of home that people feel they need. Much of the interest we’ll pay on debt incurred during the Bush years is thus money down the drain.

Let’s put into perspective the current rate of deficit. Even though the numbers are astronomical and make for great hysterical fodder on the floor of the U.S. Senate and House, let’s consider just what it means.

Over the last eight years, Bush administration deficits raised the national debt by almost $5 trillion. Given the current crisis, it’s easy to imagine a similar increase during the next four years. At recent interest rates, servicing $10 trillion of extra debt costs about $400 billion annually — a big amount, to be sure, but less than 3 percent of the economy’s full-employment output. We’ll still be the richest country on the planet even after paying all that interest.

Once the downturn ends, there should be no need to incur additional debt. Indeed, there are many ways to pay down debt without requiring painful sacrifices.

There’s plenty of room for discussion on this idea. I do hope commenters will let us know their sources and their credentials since it’s important for us to discern between opinions and real expertise.

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  1. #1 by Moribund Republic on March 22, 2009 - 1:24 pm

    So the constant whining by Democrats over republican budgets was just for fun right Becky?

    You guys really are stupid, given our situation now, it is more than obvious there is no “expertise”.

  2. #2 by Larry Bergan on March 22, 2009 - 1:26 pm

    I suggest going back in time to the day before we invaded a country that did nothing to us, but since we don’t have that option, let’s allow Paul Krugman to fix it. He’s been saying this all along. Nobody has been willing to speak out more, despite the obvious risks he took by doing so.

    Obama says he’ll be able to recoup enough money from winding down Bush’s war, (world war stupid), to rebuild our economy in the future, but what we need right now is an injection of activity designed to create jobs that are focused on building a livable future for all, rather then turning America into a police state designed to allow one half of one percent of us to run rampant.

  3. #3 by Moribund Republic on March 22, 2009 - 1:28 pm

    So you suggest cranking up the time machine Lar Lar? Beautiful.

    It’s a good thing you guys don’t mind losing money. I expect by now Becky at least should qualify as an “expert”. How ’bout you Larry?

  4. #4 by Larry Bergan on March 22, 2009 - 2:19 pm

    Moribund/s:

    All of the people who you say post under that name had a meeting and that was the best response you could come up with?

    Becky is an expert blogger. I told you who my expert on the economy was in my comment.

    What’s the use?

  5. #5 by Cliff on March 22, 2009 - 3:23 pm

    I think Moribund (Glenn Hoefer) has a crush on Becky.

  6. #6 by Becky on March 22, 2009 - 5:51 pm

    Moribund,

    You seem desperate for a comment from me. I don’t claim expertise and must look to recognized experts in the field. Now tell us, MR, what are your credentials that we should believe any of your doom and gloom forecasting.

  7. #7 by Moribund Republic on March 22, 2009 - 6:40 pm

    Being right about what has past and is to come. Ask Cliff. By the way, there is no Glenn here, so whoever he is, it nice to know that great minds think alike.

    Sorry folks the crush is in response to sycophantic posts she (Becky) puked up after Obama was elected.

  8. #8 by Larry Bergan on March 23, 2009 - 9:30 pm

    Oh crap!

    “This is more than disappointing,” Krugman wrote in The New York Times. “”In fact it fills me with a sense of despair.”

    “The Geithner scheme would offer a one-way bet: if asset values go up, the investors profit, but if they go down, the investors can walk away from their debt,” the Princeton University economist said, citing weekend reports outlining the plan.

    Double oh crap!

    …it never would have used Lawrence Summers, the chief economic adviser, as a messenger just as the A.I.G. rage was reaching a full boil last weekend. Summers is so tone-deaf that he makes Geithner seem like Bobby Kennedy.

    Bob Schieffer of CBS asked Summers the simple question that has haunted the American public since the bailouts began last fall: “Do you know, Dr. Summers, what the banks have done with all of this money that has been funneled to them through these bailouts?” What followed was a monologue of evasion that, translated into English, amounted to: Not really, but you little folk needn’t worry about it.

    P.S. I couldn’t find a link to Krugman’s article, which may have been my fault.

    sigh

  9. #9 by cav on March 24, 2009 - 10:16 am

    Krugman’s just another network economist, he has his interests, and he may lean a little left. but his mind is not big enough to wrap this hideous mess, so don’t get discourageed if he pouts.

    Me, whenever I see a crack in the sidwalk, I take it as a sign of the inevitable collapse of our civilization. Then I go right to blaming Bush! Been like this for forever.

  10. #10 by Moribund Republic on March 24, 2009 - 12:07 pm

    “Do you know, Dr. Summers, what the banks have done with all of this money that has been funneled to them through these bailouts?”

    That the Democrat Congress approved. Proving once again the wisdom of Gump’s Mom, that stupid is, as stupid does.

  11. #11 by Larry Bergan on March 24, 2009 - 2:28 pm

    I hope you’re right cav, but I have my doubts about some of his appointments.

  12. #12 by Moribund Republic on March 25, 2009 - 12:01 pm

    From the beloved NYT, that is always so full of truth, this not so little tidbit.

    We are losing friends as fast as we are losing wealth.

    http://www.nytimes.com/2009/03/26/world/europe/26czech.html?_r=1

  13. #13 by cav on March 25, 2009 - 12:14 pm

    Larry, I have my doubts as well. But are we in any beter or worse position to grapple with the crap our corporatocracy will foist on us than when whose who must not be mentioned took office only eight plus short years ago?

    There are people who make a lot of sense who are not nearly so dower.

  14. #14 by meanwhile on March 27, 2009 - 10:51 am

    One of the reasons that Krugman has been so consistently wrong on Obama moves is that he insists on evaluating all steps in terms of what he considers optimal for that step. He does not even attempt to see e.g. Geithner’s plan in relation to other treasury moves (like funding regional banks), the stimulus, or the health-care plan. But Obama’s team is apparently able to juggle multiple initiatives. That’s why Krugman was so wrong on stimulus – because it didn’t occur to him to think about the upcoming budget process (and the continuation budget is already a massive improvement) as part of the whole government spending issue instead of thinking of stimulus as a end-all-be-all

  15. #15 by Larry Bergan on March 27, 2009 - 2:13 pm

    I’ve sort of hung my hat on Krugman for the last little while because there was really no where else to hang it in the corporate media realm. Obama seems trustworthy on lots of levels and I like to think he’s calling all of these people who had a big part in causing our problems into his office to say ‘I’m giving you one more chance to bring the country in for a safe landing.’

    In the meantime, I understand China is working on something called “disruptive technology.” Sounds kind of Rumsfeldian, but he would have chosen a friendlier termin0logy. Did you know the Defense Department used to be called the War Department?

(will not be published)


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