Meth Culture in Missouri
Liveblogging World War II: June 21, 1940

Paul Krugman: Spend Now, Save Later

Paul Krugman:

Spend Now, Save Later: 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....

At the moment, as you may have noticed, the U.S. government is running a large budget deficit. Much of this deficit, however, is the result of the ongoing economic crisis.... As the crisis abates, things will improve. The Congressional Budget Office... predicts 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. Unfortunately, that’s not enough.... Furthermore, the budget office predicts that after bottoming out in 2014, the deficit will start rising again, largely because of rising health care costs.

So America has a long-run budget problem. Dealing with this problem will require, first and foremost, a real effort to bring health costs under control.... It will also require finding additional revenues and/or spending cuts. As an economic matter, this shouldn’t be hard.... 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. Every year that there are five times as many people seeking work as there are job openings means that hundreds of thousands of Americans graduating from school are denied the chance to get started on their working lives. And with each passing month we drift closer to a Japanese-style deflationary trap.

Penny-pinching at a time like this isn’t just cruel; it endangers the nation’s future.... So now is not the time for fiscal austerity. How will we know when that time has come? 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....

The responsible thing, then, is to spend now, while planning to save later. As I said, many politicians seem determined to do the reverse. Many members of Congress... oppose aid to the long-term unemployed, let alone to hard-pressed state and local governments.... Yet efforts to control health costs were met with cries of “death panels.” And 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.... Yes, we need to fix our long-run budget problems — but not by refusing to help our economy in its hour of need.

As I have said before, Obama was really not helpful--he stomped all over this appropriate and true message--with his claim that now was the time for a "three-year non-security discretionary spending freeze." That phrase shows up newly-written on the White House website about once every two days.