Spend Now/Save Later

http://www.nytimes.com/2010/06/21/opinion/21krugman.html?emc=eta1

"A 'Genius' is just a talented person who does his (or her) homework." (Thomas Edison)


Someone once said that if we ignore the lessons of history, we are doomed to repeat our mistakes. If that wasn't it exactly, we're close.

We were reminded of that phrase when we read Krugman's June 20 "Now and Later" (attached). As Krugman says, "Spend now, while the economy remains depressed; save later, once it has recovered. How hard is that to understand?"

Krugman answers his own question: "Very hard, if the current state of political debate is any indication. All around the world, politicians seem determined to do the reverse. They're eager to shortchange the economy when it needs help, even as they balk at dealing with long-run budget problems."

Returning to our reference above on "history", it is a plus for the U.S. that the current Fed Chairman did his PhD on the Great Depression. While he does not control all the levers of power relating to the economy, his opinions are listened to.

That's the plus. The minus is that 52 senators voted against extending aid to the unemployed despite the highest rate of long-term joblessness since the 1930s. Many economists, Krugman included, regard this turn to austerity as a major mistake. It raises memories of 1937, when F.D.R.'s premature attempt to balance the budget helped a recovering economy fall back into a severe recession.

While America has a long-term budget problem, there are solutions. Krugman's suggestion of a modest "value-added tax" (5%) could be helpful.

But Krugman's point is that our currently depressed economy is inflicting long run damage: every year that goes by with extremely high unemployment increases the chance that many of the long-term unemployed will never come back to the work force, and become a permanent underclass. Every year that there are 5 times as many people seeking work as there are job openings means there are hundreds of thousands of Americans graduating from school that are denied the chance to get started on a career. And, with each passing month we drift closer to a Japanese-style deflationary trap: "Penny pinching at a time like this isn't just cruel; it endangers the nation's future. And it doesn't even do much to reduce our future debt burden, because stinting on spending now threatens the economic recovery, and with it the hope of rising revenues."

We are reminded here of the position that Warren Buffet and Krugman took two years ago when they said (along with others) that the "economic stimulus" spending level was "not enough."

There is no "inflation" to worry about. Most economists feel that, under the best of circumstances, we will be in a very low inflationary cycle for a log time. Consumer prices (as measured by the CPI and excluding the food and energy components) rose .6% in the first quarter of 2010: the smallest quarterly increase in prices since 1959.

There are a growing number of economists who fear the bigger danger may be "DEFLATION." Basic economics informs that, when consumer demand is falling, and there is extensive excess capacity, we are in danger of deflation.

As we have said here before, the key lagging indicator in any economic recovery is the unemployment rate. And, that indicator hasn't improved much. When companies are hording cash (some measures put cash levels at the Top 500 companies at the highest levels ever) and not spending it on capital improvements, there is no economic "push". The only thing most companies are doing with their cash (while they wait and evaluate) is buying back stock.

So, while spending now may not be politically in, something is needed. Once unemployment has dropped below 7% on a downward path, budget deficits can be addressed.

Krugman wants to spend now and save later. We agree.