Getting Spending Right- Or Wrong- Or Both


Blogging last night at 10:23 p.m., Paul Krugman observed of President Obama's State of the Union address (transcript here):

So, I’ve read the text, and find it hard to extract any theme. We’re going to invest in the future — but we’re also going to freeze domestic spending. So mixed signals —

The speech was nothing if not one of mixed signals- which might not be bad, given consistency as allegedly the hobglobin of small minds. The address was, further, one that was mixed and a little confusing viewed in light of Krugman's economic analysis in the pages of The New York Times a year ago. Since then, most indicators are up but unemployment remains dangerously high at 9.4%, not unlike the expectation of Krugman, who supported the stimulus but prophetically suggested it would prove to be inadequate. The Nobel Prize-winning economist explained:

Let’s talk for a moment about budget reality. Contrary to what you often hear, the large deficit the federal government is running right now isn’t the result of runaway spending growth. Instead, well more than half of the deficit was caused by the ongoing economic crisis, which has led to a plunge in tax receipts, required federal bailouts of financial institutions, and been met — appropriately — with temporary measures to stimulate growth and support employment.

The point is that running big deficits in the face of the worst economic slump since the 1930s is actually the right thing to do. If anything, deficits should be bigger than they are because the government should be doing more than it is to create jobs.

True, there is a longer-term budget problem. Even a full economic recovery wouldn’t balance the budget, and it probably wouldn’t even reduce the deficit to a permanently sustainable level. So once the economic crisis is past, the U.S. government will have to increase its revenue and control its costs. And in the long run there’s no way to make the budget math work unless something is done about health care costs.

But there’s no reason to panic about budget prospects for the next few years, or even for the next decade.

Arguably, President Obama understands nothing better, and emphasizes nothing so much, as the contribution of health care costs to the nation's long-term debt. Last night he argued that "to tackle our deficit" involves

further reducing health care costs, including programs like Medicare and Medicaid, which are the single biggest contributor to our long-term deficit. The health insurance law we passed last year will slow these rising costs, which is part of the reason that nonpartisan economists have said that repealing the health care law would add a quarter of a trillion dollars to our deficit. Still, I'm willing to look at other ideas to bring down costs....

But Krugman noted also

running big deficits in the face of the worst economic slump since the 1930s is actually the right thing to do. If anything, deficits should be bigger than they are because the government should be doing more than it is to create jobs.

True, there is a longer-term budget problem.

Unfortunately, Obama in his address suggested going in precisely the opposite direction. He promised "painful cuts" because he is "proposing that starting this year, we freeze annual domestic spending for the next five years" (which) "would reduce the deficit by more than $400 billion over the next decade, and will bring discretionary spending to the lowest share of our economy since Dwight Eisenhower was President." Nonetheless, the President added

Cutting the deficit by gutting our investments in innovation and education is like tightening an overloaded airplane by removing its engine. It may make you feel like you're flying high at first, but it won't take long before you feel the impact."

It's not clear at all that Obama's "investments" in either "innovation and education" are of the sort that would create a significant number of jobs in the short term. It sounds, at least, like an increase in spending in the long-term; and given that much of that spending is likely to occur after the nation pulls itself out of the economic slump, the impact on job creation is questionable. Spending on innovation and education probably is a wise policy choice, adding to the cultural and economic vitality of the U.S.A. in the long-run. But as the engine for short-term economic growth, its value is likely to be limited while it increases future debt.

As politics, it works. Conservatives hear "reduce the deficit, "freeze annual domestic spending," and "painful cuts" and it sets their hearts atwitter. Liberals hear "investments" and "education" and "children" and think that the Barack Obama they worked, and voted, for, lives. The hope here, though against most available evidence, is that President Obama understands the need for short-term spending that boosts employment and the need to address the deficit once the nation pulls itself out of this economic mess created by Wall Street.

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