Deficit Hysteria Reminiscent of Pre-Iraq-War Groupthink

Paul Krugman notes in his current NY Times column: media reports that the deficit threatens economic stability "aren't facts."

Many economists take a much calmer view of budget deficits than anything you’ll see on TV. Nor do investors seem unduly concerned: U.S. government bonds continue to find ready buyers, even at historically low interest rates.... 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.

Read the whole column here.



On a closely related topic, see Jonathan Chait on Rehabilitating Bush.

Bush economic advisor Keith Hennessey tries to blame CBO projections for conservative predictions that the Dow would reach 36,000 and other Pollyanna-ish scenarios meant to ease the political climate for tax cuts. In reality, dismissing warnings by Paul Krugman and others (including TNR), Republicans argued at the time that the CBO estimates were too pessimistic.