According to the likes of Paul Krugman and President Obama, we need more deficit spending. The stimulus will create a booming economy that will more than pay for itself in tax revenues.
Hold on a second. Haven’t we already heard this argument?
Said Paul Krugman in late 2009: “Spending more on recovery will lead to a stronger economy, both now and in the future — and a stronger economy means more government revenue.”
President Obama opined at a recent press conference: “One of the most important things we can do for debt and deficit reduction is to grow the economy,” adding that “if there are steps that in the short term may reduce the amount of cash in the treasury but in the long term mean that we’re growing at 3.5% instead of 2.5%, then those ideas are worth exploring.”
The president really could use a boost in the job market before 2012, so it’s not surprising that he would make this suggestion. However, his logic goes one further than Krugman’s: deficit spending in the short-run will reduce the deficit in the long-run. Hmm, it is possible, but unlikely to play out that way when the deficit is as high as 10% of GDP (and we’re at a cumulative point where we need to think about more than just reducing the growth rate of the deficit). Even if the debt began to come down in, say, 2015, it does not make deficit spending today and the hypothetical 2015 debt reduction directly causal events.
The liberal Laffer Curve sounds nice, but we had hundreds of billions of dollars in stimulus already and are still enjoying the weakest recovery since the Great Depression. As the vintage liberal counterfactual goes, just think how bad things would have been had we not spent hundreds of billions in stimulus and the Fed didn’t buy $2 trillion of securities.
That unprovable statement always sells me. Especially when natural experiments work their way out, such as the comparison of commercial versus residential real estate since the crisis. The government did not intervene in commercial and have done all they can to prop up residential. As a result, commercial real estate is recovering because we did nothing, while residential still has a ways to go before bottoming out in most markets. We know this because total housing inventory (plus shadow inventory) is very high and the weak job market isn’t creating new buyers. Maybe we finally have that coveted counterfactual.
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