The following is taken from http://economistsview.typepad.com/economistsview/2009/03/ken-rogoff.html—.
It is a comment by Paul Krugman to the many people, such as Ken Rogoff, who are anxious to pin our economic problems on the deficit. He says:
The stimulus package wont prolong the recovery period it will shorten it by jump starting the economy in important areas and keeping it going until the private sector can take over (think of the government spending and tax cut as a bridge over trouble assets). –Stabilization policy does not have to change the size of government in the long-run.
What Krugman is saying is that, in the short term, the stimulus package does not create additional (temporary) public debt. It only makes certain that (in the short term) GDP and employment are much larger – but debt is much the same. It helps to stabilize both debt and output.
By attacking this strategy, what people like Rogoff are doing is to use the deficit as an ideological pretext to run a political agenda e.g. to attack the welfare state.
This is surely the best response one could make to Malcolm Turnbull. My own response is on http://www.onlineopinion.com.au/view.asp?article=8568—. It is rehash of an earlier Club Troppo piece.
Didnt they try that same policy in Japan?
I don’t follow what you’re saying Fred, and can’t see what you divine in Krugman’s words. He’s saying – it seems to me – that public debt will rise and that that is the lesser of two evils (and further that deficit spending will cost less than 100 cents in the dollar because of increased tax receipts (though granted, some spending with sufficient multipliers might be on the right side of the Laffer curve. Thus the expenditure on increasing the first home owner’s grant for new houses is likely to reduce the deficit because it seems to be leveraging so much activity.
Somehow the Fred Argy argument is substantially one based on ideology eg abortion, gay rights so the implication that Turnbull uses the deficit as an ideological pretext to run a political agenda e.g. to attack the welfare state doesnt run true.
Krugman? The linked post is by Mark Thoma.
As for the interpretation, I agree with with Nicholas that Fred’s words probably don’t express exactly whay he meant. Thoma seems to be saying no more than that deficits can in principle pay for themselves in the long if they restore activity and tax revenue permamnently to a higher level.
Nicholas and James, as I understand it, Krugman (or rather Mark Thomas) alleges that without any stimulus package output would be much smaller and unemployment higher in the short term. This would (by itself) inflate the deficit (and debt) as, over the short term, it would lead to higher numbers on jobless benefits and much lower corporate profits.
This would happen in two stages a smaller increase in consumption and no increase in saving. The no increase in saving (or actual decrease) would make future consumption less sustainable or manageable relative to income, as Gruen and Quiggin have been saying.
In short, public debt would be as great (over a period) as it would be under the original fiscal stimulus – but with a much worse output outcome.
I believe this is what the writer meant to say. In a sense, James Farrell has it right when he says that “deficits can pay for themselves in the long term if they restore activity and revenue permanently to a higher level but with a much superior short term output.
Org, the welfare state I was referring to is not about social conservatism, but about total government spending on social security. This would happen because pressure to lower debt, as larger deficits emerge, would impose much harsher controls over spending.
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