Paul Krugman: Liquidity Preference and Loanable Funds
For the Virtual Green Room: June 6, 2011

Real Social Democrats Worry About the Long-Run Deficit

Mike Konczal writes:

The Importance of Deficit Cutting to Liberal Economists: A lot of people seem surprised the Democrats have implicitly prioritized deficit cutting over job creation and full employment. It’s an explicit goal for Republicans, so that isn’t a surprise. But why are Democratic, liberal types not worried enough about the demand shortfall and so much more worried about deficits? It might be helpful to see what a prominent, liberal macroeconomist would say about the state of the world going into the recession.... [Christina Romer:] "Macroeconomic Policy in the 1960s: The Causes and Consequences of a Mistaken Revolution"...

One of the most striking facts about macropolicy is that we have progressed amazingly.... In my opinion, better policy, particularly on the part of the Federal Reserve, is directly responsible for the low inflation and the virtual disappearance of the business cycle in the last 25 years.... What stops this story from being a good morality play is... a remarkable lack of progress in long-run fiscal policy. In this area, the legacy of 1960s beliefs is still very much with us and may threaten the long-run stability of the American economy.... The consequences of persistent deficits may only be felt over a very long horizon.... Perhaps over a wide range, deficits and the cumulative public debt really do have little impact on the economy. But, at some point, the debt burden reaches a level that threatens the confidence of investors. Such a meltdown and a sudden stop of lending would unquestionably have enormous real consequences...

Let me note that Christina Romer has not prioritized deficit cutting over job creation and full employment.

And let me note that Christina Romer is correct: in the long run, either the government raises enough revenue to keep its deficit small enough that the debt-to-GDP ratio does not explode, or the market will do something to the economy and the government--and that something is something that we will not like at all.

To pretend that bringing the long-run spending and long-run taxing plans of the government into rough balance is not an essential task of economic policy is to work to end economic prosperity, and to end social democracy as well.