An effective reply to Malcolm Turnbull

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.

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rog
rog
13 years ago

Didnt they try that same policy in Japan?

Nicholas Gruen
Admin
13 years ago

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.

rog
rog
13 years ago

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.

Joshua Gans
13 years ago

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.

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