AP Photo/Lai Seng Sin: Paul Krugman
Paul Krugman, the Nobel laureate in economics, yesterday argued that deficit spending as policy is nothing to be afraid of. In a New York Times piece, "Till Debt Does Its Part", Professor Krugman takes the position that deficits are actually helping the economy. The decrease in tax receipts combined with increases in unemployment benefits and stimulus outlays are also a part of the deficit, Professor Krugman reminds us. We also should not forget that we are offsetting outlays with the assets that we have purchased. Doing the opposite --balancing our budget-- particularly during a slump may have resulted in, "a full replay of the Great Depression". Deficits, according to Professor Krugman, saved the world. Professor Krugman also points out that more stimulus may be needed to address the projected level of high unemployment that may be occurring for the next few years. Also, while Professor Krugman admits that while a high level of debt is a bad thing, the level of debt is manageable especially when we compare our debt to gross domestic product ratio to the 118% debt to GDP ratio of Belgium in the early 1990s. Yes. Belgium. Not exactly the economic powerhouse that we should choose to emulate, but it is the issue of incurring bad debt that I have problems with. Deficit spending, at least in the short term, need not be a bad thing. If the primary goal is stabilizing the economy, funding income transfers such as unemployment benefits work to automatically stabilize a downturn in demand for goods and services. In a downturn where tax receipts have decreased and demand for commodities remains virtually the same, we should expect deficits. We may have to borrow in order to fund these transfers. What Professor Krugman does not properly explain is the proper role of borrowing. Professor Krugman appears to endorse borrowing if and only if debt will plug up a few wholes in the dyke. There is no mention of the returns we should be getting from excessive borrowing. Yes, there is the soft return of government ensuring that Americans are able to receive food stamps, get medical insurance for their children, and pay their rent. What Professor Krugman fails to address are the hard returns. For all the money we borrow, how does this borrowing impact our output? Are we increasing our GDP as a result of the borrowing? What are the monetary returns? In this age of bailouts, if Americans are going to pay higher taxes to support an increasing amount of debt, then there has got to be returns on the debt. If the federal government is going to borrow $100 billion for one year at five percent, shouldn't the government be earning some return above five percent? Can we say that we have added $5 billion in output as a result of the borrowing? Probably not. Unfortunately our approach to borrowing on the macro level is too much like the approach to borrowing that individual consumers take. Borrowing has become a stylized visit to the pawn broker or loan shark. As our borrowing continues to rise, our GDP continues to fall. Our borrowing and the stimulus package that it finances are not sufficiently aimed at building our human and physical infrastructure. By my estimates, only 12% of the American Recovery and Reinvestment Act goes toward stimulating infrastructure development yet we giddily implement a stimulus package that is doomed to be highly ineffective while leaving us with a larger deficit and tax bill. In short, we should be borrowing money to make money. It's about leverage. It's a lesson that the general public has not learned and one that its government chooses to not follow.
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