The Odd Debate over Stimulus

I would have thought that for most people stimulus spending makes sense. When the economy is in the dumps and people are scared, it makes sense for the government -- on behalf of the people -- to step in and spend. The government can "print money" to create demand. Sure it creates a current deficit and that adds to an overall federal debt, but if Bush could run up $400 billion deficits during the "boom" years of the housing bubble, why wouldn't you spend when people are white knuckle worried over the future?

Here's some key bits from a posting by Paul Krugman on his NY Times blog that gives the story from an economist's viewpoint:

...I’m coming more and more to the conclusion that the public debate over fiscal stimulus, which views it as an agonizing tradeoff between possible benefits now and certain costs later, is wildly off base.

... first, in the short run fiscal expansion leads to higher GDP, which leads to higher revenues, which offset a significant fraction of the initial outlay. A billion dollars in stimulus probably leads to only $600 million or a bit more in additional debt.

But that’s not the whole story. Crowding in raises future GDP — which raises future tax revenues. And the rise in revenues relative to what they would have been otherwise offsets at least some of the burden of debt service.

I’m not proposing a fiscal-stimulus Laffer curve here: it’s probably not true that spending money actually improves the government’s long-run fiscal position (although that’s certainly within the range of possibilities.) What I am suggesting is that fiscal stimulus under current conditions, where the Fed funds rate “ought” to be around -5 percent, does much, much less to hurt that long-run position than the headline number would suggest.

And that, in turn, means that penny-pinching on stimulus is deeply, destructively foolish.

I really enjoy Krugman. He tells it like he sees it. He is consistent. He isn't in thrall to some political party, but he takes a people-oriented leftist approach to the economy. He's hated by the right wing nuts. He called Bush to task for his lying. He's criticized Obama for his choice in financial advisers and his eagerness to "compromise" with the right over health care.

Sadly, most people don't know enough to have a real opinion about the economy and the deficit. They get manipulated by fanatics who have a "message" to sell. These same fanatics were cheerleaders for the trillion dollar tax giveaway of Bush to the super rich, but when it comes to trying to staunch the loss of jobs by having the federal government step in to spend when people are scared, these same fanatics suddenly get "fiscally conservative". This is a lot like how Wall Street yells about giving away money to welfare bums, but suddenly comes cap in hand for a trillion dollar bailout when they collapse the economy. They are such hypocrites.