I was speaking with a friend of mine who works for the Obama administration this weekend, and he told me that deficit hawkdom is a rampant disease in Washington, in both parties, in both chambers of the Congress, at the Fed and even among some in the administration. Presaging Krugman's column today in the NY Times (see excerpt below the link), he said this is the worst time to get cold feet on deficit spending.
More to the point, it's the best time to spend beyond the government's means, because the return on the dollars spent is so good **right now.** He said something like (don't quote me), every dollar the goverment spends now is equivalent to just a little more than 50 cents. Don't ask me exactly how, but he's an economist who knows what he's talking about. (It has to do with what the government ultimately gets back in revenue). So now is the time to subsidize the states, expand unemployment benefits, shovel dough into the economy and get it buzzing again. There's no better time.
I asked my friend why this disease is spreading and whether it's possible to stop it. His answer to the why: Politicians believe the crap pundits spew about the "popular mood" against deficit spending and are afraid to disturb it, especially in an election year. It's one thing to suspect such cowardice based on what looks like cowardice via the media. It's quite another to have it confirmed for you by someone who has a front row seat to it. Washington is a group think town. You'd like to believe that all those advanced degrees in one place would mean some people in positions of power are capable of thinking, right? Well, some are, but not enough, and most of the rest of the geniuses in the capital are afraid to be caught thinking what no one else is thinking.
Folks, this is a serious problem. This is reminiscent, in my view, of the period before the Iraq war when it was clear that most Americans did not want it, and millions of us were leaning hard on our representatives to stop it--and they weren't hearing us.
This goes to the question of whether it can be stopped? I only wish I could say I was more of an optimist.
http://www.nytimes.com/2010/06/21/opinion/21krugman.html?dbkAt 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, which has depressed revenues and required extraordinary expenditures to rescue the financial system. As the crisis abates, things will improve. The Congressional Budget Office, in its analysis of President Obama’s budget proposals, 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. Even if the government’s annual borrowing were to stabilize at 4 percent of G.D.P., its total debt would continue to grow faster than its revenues. 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 — without that, nothing will work. It will also require finding additional revenues and/or spending cuts. As an economic matter, this shouldn’t be hard — in particular, a modest value-added tax, say at a 5 percent rate, would go a long way toward closing the gap, while leaving overall U.S. taxes among the lowest in the advanced world.
But if we need to raise taxes and cut spending eventually, shouldn’t we start now? No, we shouldn’t.
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