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Missing the deficit opportunity

"Spend now, while the economy remains depressed; save later, once it has recovered," writes Paul Krugman. "How hard is that to understand?"

I think we can be even more specific than that. The rate on 10-year treasuries is about 3.42 percent right now, which is extremely low. That means two things: First, it's uncommonly cheap for the government to borrow money right now. Second, the market is not that concerned about our deficit right now. We're in this enviable situation because America is considered stable and other economies and investments are considered less stable

The rate on our treasuries will rise at some point. It might even change "on a dime," as people like to say. It'll be that change that forces us to do long-term deficit reduction. In the absence of that external pressure, we're not going to do any serious deficit reduction (at least, not outside what we passed in health-care reform). Let's be honest about that with ourselves.

So what we're left with is a space between now and when interest rates begin to rise. That space is defined by a weak economy with low growth, high unemployment and cheap rates for the government to borrow money. We should use this period before the markets turn on us to borrow money at low rates in order to get our economy back on its feet and make what long-term investments we feel like we want to make (retrofitting schools, for example). When the global economy begins to recover and interest rates rise to, say, a still-low 5 percent, we can pull back on the stimulus and begin deficit reduction.

This is the benefit of being the superpower: America's economic status drives our borrowing costs down when the rest of the world faces an unstable economy. The pity is that we're likely to squander it, and for nothing. If we do too little now to deal with unemployment and anemic growth, we'll have to do more later when borrowing is expensive and when we need to be doing deficit reduction. I'd imagine that lots of businesses would love the chance to borrow at a rate much lower than their competitors at a moment when they really needed to spend, but we seem to prefer to argue about how aggressive we should be in not taking the opportunity.

By Ezra Klein  |  June 21, 2010; 4:31 PM ET
Categories:  Budget  
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Next: Reconciliation


"We should use this period before the markets turn on us to borrow money at low rates in order to get our economy back on its feet and make what long-term investments we feel like we want to make"

You're mixing apples and oranges here. If (apples) you want to stimulate the economy, stick with that argument. Please do not pretend (oranges) that the the government will use the funds to make economically sensible long-term investments.

Posted by: ostap666 | June 21, 2010 5:01 PM | Report abuse

Krugman's blog post today about Social Security (and the "zombie ideas" concerning same as voiced by Alan Simpsonome in the deficit commission) is also a worthwhile read:

Posted by: Patrick_M | June 21, 2010 5:21 PM | Report abuse

I think it will be more useful if Ezra's blog, or even better Washington Post, starts collecting ideas / concrete proposals from American people where that money is to be spend. Have a running 'registry' of the projects. That will demonstrate people's preferences and kind of 'menu' prepared for Politicians to act upon; if they want.

I believe the core debate will be 'deficit financed spending on what?'.

I know in a sense this is all going on so far, but it appears that from reluctance of Politicians to extend unemployment to the need to improve infrastructure; we Americans are not clear where to use any such borrowed money.

Posted by: umesh409 | June 21, 2010 5:21 PM | Report abuse

A list of spending ideas might actually be helpful. A year ago, we hear quite a bit about "shovel-ready" projects -- only to discover that no such projects existed. The lack of such shovel-ready projects -- the lack of hope and forethought -- is troubling in itself.

I've mentioned before that I generally favor deficit spending on infrastructure assets but not deficit spending on interminable expenses like welfare. Deficit spending on infrastructure becomes even more attractive when it can be accomplished without artificially inflating the prices paid by prudent investors unaffected by the misbehavior of the financial sector, unions, and fiscally imprudent governments. One potential compromise might involve deficit spending on infrastructure combined with true affirmative action against unemployment and a sort of inverse Davis-Bacon; that is, deficit spending on infrastructure projects which favor employment of the employed, pay employees national (non-localized) Davis-Bacon wages at maximum (not minimum), employ all willing workers regardless of union membership status, and offer only those fringe benefits required by statute in effect as of July 1, 1980 [a random date before the demise of the Glass Act]. These provisions might stabilize regional participation (and the longer-term inflation therein) and would help assure that currently-employed workers aren't drawn to jobs intended to assist the unemployed.

Posted by: rmgregory | June 21, 2010 5:46 PM | Report abuse

There are many well-known examples in history where countries have ended periods of depression or recession or stagnation with proactive gvmt outlays/projects. FDR did it. Reagan did it. Hitler did it. Even GWBush did it briefly with the Iraq War

Wars are a kind of keynesian stimulus, though losers of wars (Hitler, GWBush, et al) tend to have their initial gains destroyed.

Can anyone point to examples in history where deficit-hawkery and/or massive tax cutting in any country brought a country out of economic malaise? I am aware of not even one example.

Posted by: Lomillialor | June 21, 2010 5:46 PM | Report abuse

"Spend now, while the economy remains depressed; save later, once it has recovered," writes Paul Krugman. "How hard is that to understand?"

People don't trust that we'll 'save later'. The deficit is about 10% of GDP. Let's suppose that we increase spending so that in 2011 it will be 12% of GDP. Let's say that unemployment is at 8% by the end of 2011 - GDP has been growing for 2+ years. Will Krugman allow us to cut the deficit to a still unacceptably high 6% in 2012, or will be told that 'unemployment is still high' and 'that would be like 1937'?

Maybe 11% of GDP will be acceptable in 2012. And maybe down to 9% in 2013 and 7% in 2014 and 5% in 2015, when unemployment might be as low as 6%. Oh no, another recession hits in 2016, unemployment is back up to 8.5% and the deficit is back to 9% of GDP. Can we cut the deficit now or would we risk 1937?

Also, if stimulus works doesn't that mean you get an equal and opposite effect by withdrawing it? If the government spends $800 billion to create a supposed 3 million jobs, then why would those jobs stick around once that $800 billion spigot is turned off? Or do these multipliers only work in one direction?

"We should use this period before the markets turn on us to borrow money at low rates in order to get our economy back on its feet and make what long-term investments we feel like we want to make"

This is sensible - if the return on investment exceeds the cost then sure, go ahead and invest.

" Second, the market is not that concerned about our deficit right now."

The market wasn't concerned about Greece a year ago. Greece 5yr CDS spreads were in the low 100s back during 2009Q3. The U.S. is at 40bps right now, but it did break 100bps back in early 2009. Greek CDS spreads are now in the 800 context. Rates might be low right now but they can spike at any time - and if you've got a lot of debt to rollover that can be problematic.

Posted by: justin84 | June 21, 2010 6:13 PM | Report abuse

justin84 is right. The "people" and the government behind them will not cut the deficit in "good times"

When the economy finally turns around again and we start running surpluses, one of two things will happen:

1) Massive tax cuts will take place
2) Spending will go up, not down.

Both of these things will eliminate any chance of cutting the deficit in a meaningful way. Yeah, maybe we'll cut it down by some paltry 100 million per year, but that will only last for 3-4 years until we get into another slumped economy and we'll be back at square one again.

Krugman and Klein among others always assume that the "good times" will be long and plenty following an economic downturn. History shows that to be false. We will have a couple of years of a strong economy but then we'll have "malaise" again and when that happens Krugman will be screaming that the social welfare net needs expanding; and the republicans will be screaming that we need a massive tax cut.

Either way, the deficit aint gettin any better. Even if we had 50 good years, the will to restrain spending and increase taxes to pay down the deficit is not there.

Posted by: platon201 | June 21, 2010 7:50 PM | Report abuse


But if the deficit is not going to be in control in the long run anyway, what's the utility of bringing it down marginally in the short term at a cost in GDP growth?

Posted by: windshouter | June 21, 2010 9:17 PM | Report abuse

Denninger at Market-ticker had one word for Krugman: "Ridiculous".,-Save-Never.html

And then he gave him a whole page of words.

Krugman, like Klein, is a propagandist for big government, and they're both bloody fools.

Posted by: msoja | June 21, 2010 9:33 PM | Report abuse

Please let's not talk about Greece. We might as well talk about any large city in the US with budget problems. The GDP of Greece is comparable to that of the Dallas Ft Worth Metroplex. Lots of States need help. The problem is that maybe the crisis is good in that it gets them to make difficult choices they would not normally make to fix their problems. But for us to be screaming about the deficit nationally right now is foolish. If deficit reduction damages the economy what do you think the Repubs will be screaming and who will they be blaming. As stated before by Lomillialor, deficit reduction has never cured a recession so why think it is now the magic pill ?

Posted by: Falmouth1 | June 22, 2010 5:58 AM | Report abuse

Uh, Clinton cut the deficit and created surplusses. So don't tell me we will never cut deficits. Obama cut the deficit 8% last year from the projections, and he took concrete steps to make that happen. He's taking further steps now to cut immediate spending another 10% and he has a commission working to cut it even further.

If we simply stop electing idiots like Reagan and the two Bushes, three men who together created over 80% of the entire national debt, we wouldn't be having this discussion.

You don't let idiotic ideologues ruin things when they are in office and then let their followers and ideas ruin things when they are not in office. It's called INSANITY.

You don't stop doing smart things (i.e. taking steps during severe down cycles) just because some yahoo screwed it all up in the past. The last President came from Texas, a place where GOP politicians are now threatening to imprison gays and sabotaging textbooks out of ideological urges rather than address severe problems of the day people like them caused.

What you do is recognize that a modern economy requires a certain amount of smart "investing" by the gvmt when the chips are down.

The recent stimulus actions from many countries by all objective accounts pulled us from a deep spiral that threatened to create a worldwide depression. History is replete with instances where such actions have saved the economy.

That said, I don't know why anyone bothers wasting their breathe on these subjects. I feel like I am talking to yelling children. There are idiots and there is everyone else. Anyone advocating we sit back and do nothing as the economy teeters and threatens a decade long recession are most likely the same ones who supported the GOP in their endless spending sprees and tax cuts, war of choice, and so on. You people need to get a clue and start reading more and talking less.

I used to be a Republican. Then I stopped drinking the cultural kool-aide and started looking at facts and reason. Look at the news. The GOP wants to do NOTHING but preserve the fragile status quo of greed and avarice, as evidenced by their constant "no votes" and failure to propose reasonable compromises on critical reforms. They want to apologize to BP, they want to investigate Obama's birth certificate, they want to cut more taxes for the wealthy though they are hoarding the largest chunk of change for their class in world history, they want to allow guns in Disneyland and next it will be on airliners, they want more deep water drilling NOW without even waiting to learn and apply the lessons of the current disaster, and they want unlimited corporate dollars in our elections. These people are just a bunch of useless, dangerous cultural knee-jerks and the sooner independants understand all this, the sooner we can stop our slide into obscurity. I am not holding my breath.

Posted by: Lomillialor | June 22, 2010 7:17 AM | Report abuse

--"Clinton cut the deficit"--

The yearly deficit may have fallen during Clinton's terms, but I don't believe overall debt was ever reduced.

And Clinton had little to do with it. A sack of potatoes could have "cut the deficit" during the tech boom of the nineties, which were nicely fueled by the tax cuts of the eighties.

Posted by: msoja | June 22, 2010 8:47 AM | Report abuse

If only Obama understood basic accounting; then we wouldn't be having to choose betweeen spending and deficit reduction. He'd be on board with all of us in knowing that right now we better spend, spend, spend. Marshall Auerback, the expert on this, has a must read post on this today:

Posted by: BryceCovert | June 22, 2010 12:06 PM | Report abuse


The guy at that link is dim incompetent:

"When a private entity goes into debt, its liabilities are another entity’s asset. Netting the two, there is no net financial asset creation. When a sovereign government issues debt, it creates an asset for the private sector without an offsetting private sector liability."

That last is nonsense. Government borrowings have to be repaid just like private borrowings, and the government borrowings, like all government spending, redounds to the private sector. There is no stupid free lunch.

Posted by: msoja | June 22, 2010 12:39 PM | Report abuse

Deficit reduction is a political lever favored by Republicans and Blue Dog Democrats looking for re-election. It looks great to voters without requiring any real action.

In an economy 72% dependent on consumer spending, the fastest way to improve that economy is get money in the hands of unemployed consumers, whether by unemployment benefits or community/infrastructure improvement.

But giving away money to the unemployed is anathema to conservative Republicans and Blue Dogs. They'd rather people starve than taint their philosophical purity.

Posted by: tomcammarata | June 22, 2010 6:53 PM | Report abuse

--"But giving away money to the unemployed is anathema to conservative Republicans and Blue Dogs. They'd rather people starve than taint their philosophical purity."--

Cute, but more will starve when the government has stolen all the country's productivity and wasted it on socialist notions of faux egalitarianism. When you run out of other people's money, and you eventually will, because few will voluntarily consent to being robbed year in and year out, and will slowly curtail their own output, then will there be hell to pay.

Posted by: msoja | June 22, 2010 8:42 PM | Report abuse

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