The Long And The Short Of It

This from Dr. Krugman's blog - please follow link to original
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December 10, 2011, 11:32 am
The Long And The Short Of It

Olympia Snowe talks nonsense:

Fiscal shenanigans such as permanent tax increases to pay for one-year temporary measures are precisely the problem that drove our nation into a $15 trillion debt crisis.

Actually, it’s nonsense on multiple levels. A nation that can borrow at negative real interest rates isn’t exactly facing a debt crisis. We do have a $15 trillion debt — but that debt reflects a combination of (1) permanent tax cuts, not paid for at all (2) large temporary spending on wars, not paid for at all, and (3) a severe economic crisis, which has depressed revenue (mainly) and required some emergency spending (which accounts for only a small piece of the debt)

And another thing: short-term outlays offset by long-term austerity is precisely what macroeconomics 101 says you should do when faced with a depressed economy. It’s not “shenanigans”, it’s orthodox macro and the height of responsibility.

All this gives me an occasion to say more about something that comes up fairly often both in comments here and in attacks from the usual suspects: why did I criticize Bush’s deficit-increasing policies, then call for more deficit-increasing policies from Obama?

Part of the answer is the difference in economic conditions. Deficit spending is expansionary when the economy is in a liquidity trap; it does nothing but crowd out other spending when you’re not up against the zero lower bound, and the Fed will just raise rates to offset fiscal expansion.

The other part of the answer is that although the Bushies were happy to use Keynesian arguments to justify their tax cuts, those cuts were all designed to be permanent — that is, they were irresponsible precisely because they weren’t temporary. None of what Obama has done commits that sin: his long-term spending, basically on health reform, is paid for, and everything else, like aid to state and local governments or expansion of unemployment benefits, was both designed to be temporary and has proved temporary in reality.

Ah well — just another day in political Bizzaroworld