In his column this morning Paul Krugman urges fiscal stimulus to pull the economy out of its doldrums:
On the other hand, there’s a lot the federal government can do for the economy. It can provide extended benefits to the unemployed, which will both help distressed families cope and put money in the hands of people likely to spend it. It can provide emergency aid to state and local governments, so that they aren’t forced into steep spending cuts that both degrade public services and destroy jobs. It can buy up mortgages (but not at face value, as John McCain has proposed) and restructure the terms to help families stay in their homes.
And this is also a good time to engage in some serious infrastructure spending, which the country badly needs in any case. The usual argument against public works as economic stimulus is that they take too long: by the time you get around to repairing that bridge and upgrading that rail line, the slump is over and the stimulus isn’t needed. Well, that argument has no force now, since the chances that this slump will be over anytime soon are virtually nil. So let’s get those projects rolling.
Although I support some of what Dr. Krugman is proposing here, e.g. extending unemployment benefits, I’m skeptical about others. For example, it seems to me that loss of tax revenue and political pressure are to governments what competition is to private enterprise. The discipline of needing to economize is exactly what state and local governments need and taking the pressure off is exactly the wrong thing to do. I certainly think that if the federal government starts pumping money into state and local governments there ought to be some requirements that these governments start modernizing their operations and trimming payrolls with specific targets and enforcement. Historically, the federal government hasn’t been particularly good at that sort of thing.
I also seem to recall that Lord Keynes wasn’t overly fond of permanent deficits and thought that running deficits to produce a stimulus should be balanced with running surpluses, a practice that politicians have found impossible over time.
Fond as I am of historical parallels I can’t help but wonder if looking to the past for guidance on what to do now is an error. We may be in uncharted territory. During the Great Depression government didn’t already account for 30% of GDP, public debt wasn’t 70% of GDP, and our economy wasn’t globalized to the extent that it is now. Any federal fiscal stimulus should be very carefully crafted so that it stimulates our own economy rather than those of China and India.