10 November 2010

Deficit spending

Brad DeLong explains why deficit spending is a very good idea right now.

The principle to which Interfluidity refers is that when times are bad--when your present and expected future resources fall--you should cut back on your commitments. The fact is that these are bad times for private economic actors: their current incomes have fallen, and the high interest rates charged them means that their future resources are worth a lot less than they used to be when translated into claims on today.

But things are completely different for the government.

The terms on which the U.S. government today can borrow are extraordinarily, unbelievably good. The government's current resources have declined with the decline in tax revenue, but the taxes the government will receive in the future are--according to a bunch of calculations John Cochrane made when he came to Berkeley to give a seminar--worth roughly four times as much when translated into claims on goods, services, and labor today as they were worth three years ago. The resource constraints binding private economic actors have become much tighter. But the resource constraints binding the government have--because of the extraordinary falls in interest rates--become much looser. And high unemployment and slack capacity mean that the terms on which the government can get goods, services, and labor are significantly more advantageous than they were three years ago.

Every single particle of logic is crying out that now is the time for the government to pull its spending forward from the future into the present and push its taxes from the present back into the future.

The argument that “governments should be prudent in the same way as households” is not a moral argument: it is a stupid argument. It blindly closes its eyes to the reality that times feel very different for credit-worthy governments than for potentially insolvent private economic actors, and that what is prudence for the second is sheer idiocy for the first.

No comments: