Today, I'm spending some time at a conference on deficits and debt, put on by the Center for Budget and Policy Priorities and the Center for American Progress. The event is an attempt to put a progressive spin on a traditionally centrist issue, but the presence of both Bob Rubin and Frank Raines should be sure to offend those both on the left and the right.
Paul Krugman just finished his speaking time on a panel. He's probably the most progressive voice on the panel, maybe at the whole conference, although everyone seems to agree that deficit-cutting efforts need to wait until the economy starts to improve. Today, Krugman made a strenuous case for pushing off "fiscal retrenchment" until full employment returns, perhaps in five years.
This is a really bad time to enage in fiscal retrenchment; it's a bad time on almost every dimension. We have, in effect, a global excess in savings: the amount that people would want to save is greater than the amount that people are willing to invest, even at 0 short-term interest rates. In that world, government deficits do not crowd out private investment; in fact, they crowd private investment in. ... Government deficits are helping the future as well as the present; by sustaining private investment, none of the usual rules apply. Even from the point of view of the fiscal situation, if you try to retrench fiscally now, you shrink the economy.
Even under current projections, Krugman says that long-term situation found in 2019 would not be catastrophic -- it would still be possible to reach a point where the debt-to-GDP ratio began shrinking. But like most of the panelists here, he thinks that the real obstacles aren't economic, they're political, and that the kind of legislating needed to solve the long-term fiscal problem requires a different political environment.
Watch the conference live.
-- Tim Fernholz