Now is not the time to worry about the deficit

Noble Prize winning economist and New York Times columnist Paul Krugman writes that now is not the time to worry about deficits.

One can only hope Congressman Paul Ryan, an unrepentant deficit hawk, and the Milwaukee Journal Sentinel editors are paying attention.

The engines of economic growth, consumer spending, fueled by private debt through most of the last two decades, and private investment are stalled. The only way to get the economy moving is to increase government spending.

But state and local government are legally required to balance their budgets. They cannot increase spending. They will be forced to cut it which will make the downturn worse.

Last year state and local government spending was one of the only engines of economic growth and job creation, increasing by $40 billion. Now Wisconsin is facing a $3 billion deficit. California just slashed its budget by $7 billion. Next year states will be forced to cut their spending by at least $60 billion, and that number is rising. That amounts to a $100 billion reduction in demand that will make what is shaping up as a nasty recession worse.

Interest rates are already extremely low. They need to be cut again. But that won't be enough. The only policy left is to use deficit spending to jump start the stalled economy.

Here's what Krugman has to say:

It’s now clear that rescuing the banks is just the beginning: the nonfinancial economy is also in desperate need of help.

And to provide that help, we’re going to have to put some prejudices aside. It’s politically fashionable to rant against government spending and demand fiscal responsibility. But right now, increased government spending is just what the doctor ordered, and concerns about the budget deficit should be put on hold...

...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.

Will the next administration do what’s needed to deal with the economic slump? Not if Mr. McCain pulls off an upset. What we need right now is more government spending — but when Mr. McCain was asked in one of the debates how he would deal with the economic crisis, he answered: “Well, the first thing we have to do is get spending under control.”

If Barack Obama becomes president, he won’t have the same knee-jerk opposition to spending. But he will face a chorus of inside-the-Beltway types telling him that he has to be responsible, that the big deficits the government will run next year if it does the right thing are unacceptable

He should ignore that chorus. The responsible thing, right now, is to give the economy the help it needs. Now is not the time to worry about the deficit.