To Spend or Not to Spend? That is the Question

As an individual on a limited income the answer is quite obvious to me, but what about the bigger picture? What about the government? As one who has little understanding or comprehension of what our country needs right now to help it move out of the ditch it finds itself in, I find myself turning to those who do have answers – and whom I feel comfortable listening to. One of those is Paul Krugman, Op-Ed Columnist for the New York Times and Nobel prize winner in Economics. He has a great piece in the Times this morning and it’s well worth the read. I almost felt smug – at least for a few minutes because not only did I understand what he was saying – for a change, but it was what I’ve been saying to friends lately. I shall urge them to read it, if for no other reason than to prove to them that I do have at least a few functioning brain cells left.

According to Krugman, 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.

Under normal circumstances there’s a lot to the argument 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 plants and equipment, and that this in turn reduces the economy’s long-run rate of growth. But, let’s face it, our circumstances these days are anything but normal. Imagine what would happen next year if the Obama administration gave into the deficit hawks and scaled back its fiscal plans.

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 twice in history. The first in 1937 when Roosevelt heeded his own era’s deficit worriers and sharply reduced government spending, cutting the Works Progress Administration in half and raising taxes. There was a recession and a steep decline in private investment. The second one, I remember all too well, took place in the late 1990’s in Japan when the government there tried to balance its budget, cutting spending and raising taxes. There, too, was a recession that led to a steep fall in private investment and one of those that suffered was the company I worked for, Komatsu.

What we need to do is increase fiscal expansion which will be even better for America’s future if a large part of that expansion takes the form of public investment – building roads, repairing bridges and developing new technologies, all of which, according to Krugman will make the nation richer in the long run.

But the bottom line is that people who think that fiscal expansion today is bad for future generations have got it exactly wrong. The best course of action, both for today’s workers and for their children – for our country, is to do whatever it takes to get the economy on the road to recovery.