Krugman: Spend now, save later

By Steve Dzielak

Paul Krugman, the column-writing, Nobel Prize winning college professor, said it best back in May: We could use more fiscal stimulus — but Congress is balking even at extending aid for the ever-growing ranks of the long-term unemployed. Fiscal responsibility, you see — hey, and let’s make sure estate taxes stay low!

Krugman’s big worry? That policymakers would just sit there for years congratulating themselves on the soundness of their policies. In June, Senate Republicans just said Hell No! to everything in sight, including an extension of unemployment benefits for said long-term unemployed. Never mind that America is facing the highest rate of long-term joblessness since the 1930s.

Krugman focused on what many leading economists see as a huge mistake: a return to austerity. He cited 1937, when FDR’s premature attempt to balance the budget helped plunge a recovering economy back into severe recession. Then, as now, creating jobs was suddenly out, inflicting pain was in.

In an imaginary conversation with a German Deficit Hawk, Krugman counters the Hawk’s frenzy to cut deficits immediately (“because Germany must deal with the fiscal burden of an aging population”). Cutting doesn’t make sense, Krugman says, because even if you manage to save 80 billion euros — which you won’t, because the budget cuts will hurt your economy and reduce revenues — the interest payments on that much debt would be less than a tenth of a percent of your gross domestic product (GDP).

When Krugman points out that austerity will threaten economic recovery while doing next to nothing to the long-run budget position, the Hawk takes cover behind fear of the Market reaction. When Krugman wonders aloud why the Market should be moved by policies with almost no long-run fiscal impact, he is cut dead with an all-time classic: You just don’t understand our situation.

Krugman sees hypocrisy in this obsession with the deficit. Lawmakers eager to slash benefits for those in need are equally quick to stump for tax breaks for the wealthy. Senator Ben Nelson, who sanctimoniously declared that we can’t afford $77 billion for the unemployed, supported the first Bush tax cut, which cost a cool $1.3 trillion.

The Ben Nelsons of the world seem stumped by the truism, spend now, while the economy remains depressed; save later, once it has recovered. Here’s how Krugman sees it: Much of the deficit is the result of the ongoing crisis, which depressed revenues and required extraordinary expenditures to stabilize the financial system. As the crisis abates, things will improve---just not fast enough. After bottoming out in 2014, he believes, the deficit will start rising again, largely because of rising health care costs.

The answer is clear: First bring health costs under control, then find additional revenues and/or spending cuts. Right now, our severely depressed economy is inflicting long-run damage. This is not the time for austerity. The deficit should become a priority 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.

Currently, the Fed can’t do that, because the interest rates it can control are near zero, and can’t go any lower. Eventually, as unemployment falls — probably below 7 percent— the Fed will want to raise rates to head off possible inflation. At that point we make a deal: The government starts cutting back, and the Fed holds off on rate hikes so that cutbacks don’t tip the economy back into a slump. But the time for such a deal is at least two years off. The responsible thing, then, is to spend now, while planning to save later.

As Krugman emphasizes, every year that goes by with extremely high unemployment forces many long-term unemployed into a permanent underclass, even as many new graduates are denied a start on their working lives.

Penny-pinching now isn’t just cruel; it endangers the nation’s future while failing to lighten future debt burden. Krugman implores the hawks: Please get your timing right. Yes, we need to fix our long-run budget problems — but not by refusing to help our economy in its hour of need.

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