Friday, July 19, 2013

Is this possible?

The crucial point is that under current conditions, the government is not, repeat not, in competition with the private sector. Government spending doesn’t divert resources away from private uses; it puts unemployed resources to work. Government borrowing doesn’t crowd out private investment; it mobilizes funds that would otherwise go unused.

Now, just to be clear, this is not a case for more government spending and larger budget deficits under all circumstances — and the claim that people like me always want bigger deficits is just false. For the economy isn’t always like this — in fact, situations like the one we’re in are fairly rare. By all means let’s try to reduce deficits and bring down government indebtedness once normal conditions return and the economy is no longer depressed. But right now we’re still dealing with the aftermath of a once-in-three-generations financial crisis. This is no time for austerity.

It would seem to me this is a reasonable question, given the evidence we are currently seeing in the EU, particularly the southern economies - Greece, Spain, etc. and the very recent history of the US. So, perhaps this is both an important and empirical question.

The recent debate/discussion over Rogoff and Reinhart does point out the challenge of determining causality v correlation and the pitfalls of policy making. Krugman is making a very important policy assertion that is predicated upon an empirical assertion.

That said, there is a time consideration here - short term or immediate demands for action (perceived benefits) v. long term costs - the impact on growth from deficits and debt levels.

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