Krugman: We Can’t Jump Start The Economy With More Spending

US Capitol Building with cash
US Capitol Building with cash

I’m always surprised—pleasantly surprised—when I find myself agreeing with Paul Krugman. Today is one of those surprising days.

Here’s what Krugman writes:

More than a year ago, I warned that the spate of relatively good growth news occurring then was only reassuring if you believed that the economic engine had caught, so that we didn’t need to worry about what would happen as stimulus faded away. The problem was that there was no good reason to believe that. As I have since tried to point out more formally in my work with Gauti Eggertsson, the best interpretation of our current difficulties is that we’re suffering from a deleveraging shock, and that the economy will need support until over-leveraged players have had time to work down their debt.

That logic implies that you need a tow, not a jump-start; the economy is going to need help for an extended period of time.

I definitely agree with Krugman that our economic downturn is caused by a deleveraging shock. That has at least three important implications:

  • It will take a lot longer for the economy to recover from this recession than the history of recent recessions would lead you to believe;
  • low-interest rates—including qualitative easing—will not be able to spur a new “boom” phase of the economic cycle;
  • and policies aimed at preventing the rebalancing of the economy at a lower level of leverage will likely just prolong the slump.

Whether or not the government should ease the slump with additional spending depends on two things: a view of the ethics of government spending and a view of the efficacy of government spending.

Krugman believes that the government has a duty to relieve the effects of the deleveraging shock by spending. Libertarians will tend to believe that the government shouldn’t spend money for this purpose because it is always spending money earned by others. This is essentially a moral debate rather than one about economics.

Krugman also thinks that government spending will be able to ease the plight of Americans hurt by the deleveraging shock. Critics will think that such a high portion of government spending will be wasted or spent to support powerful special interests that few will be left better off because of the additional spending. The most recent evidence for this is how little difference the “shovel ready” Obama stimulus program made.

Conservatives will tend to argue that our social institutions—churches, charities, communities and families—are better means of exercising our compassion.

Add a bit of libertarian morality and subtract a bit of the faith in the effectiveness of government spending to Krugman’s position—well, that’s a cocktail I’d happily drink.

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