Friday, October 17, 2008

Deficit Now!

One of the (many) negative results of the Conservatives returning to power in Canada is that they are committed to reducing debt and avoiding deficits at all costs.

But that is not what is called for in the coming year or two. The real economy is slowing down, demand is falling, and with it will go jobs, thus decreasing demand, thus ...

What is needed is a fiscal stimulous. The government needs to spend money to create demand and jobs. When good times return, we can go back to paying down the debt and saving.

The point is well made in this article in the New York Times, by the recent Nobel Prize winner for economic - Paul Krugman.

While the manic-depressive stock market is dominating the headlines, the more important story is the grim news coming in about the real economy. It’s now clear that rescuing the banks is just the beginning: the nonfinancial economy is also in desperate need of help.

And to provide that help, we’re going to have to put some prejudices aside. It’s politically fashionable to rant against government spending and demand fiscal responsibility. But right now, increased government spending is just what the doctor ordered, and concerns about the budget deficit should be put on hold.

Before I get there, let’s talk about the economic situation.

Just this week, we learned that retail sales have fallen off a cliff, and so has industrial production. ... All signs point to an economic slump that will be nasty, brutish — and long.

How nasty? ..this [will be] the worst recession in a quarter-century.

And how long? It could be very long indeed.

... Even if the ongoing efforts to rescue the banking system and unfreeze the credit markets work — and while it’s early days yet, the initial results have been disappointing — it’s hard to see housing making a comeback any time soon. ...

In other words, there’s not much Ben Bernanke can do for the economy. He can and should cut interest rates even more — but nobody expects this to do more than provide a slight economic boost.

On the other hand, there’s a lot the federal government can do for the economy. It can provide extended benefits to the unemployed, which will both help distressed families cope and put money in the hands of people likely to spend it. It can provide emergency aid to state and local governments, so that they aren’t forced into steep spending cuts that both degrade public services and destroy jobs. ...

And this is also a good time to engage in some serious infrastructure spending, which the country badly needs in any case. The usual argument against public works as economic stimulus is that they take too long: by the time you get around to repairing that bridge and upgrading that rail line, the slump is over and the stimulus isn’t needed. Well, that argument has no force now, since the chances that this slump will be over anytime soon are virtually nil. So let’s get those projects rolling.

... What we need right now is more government spending.

... The responsible thing, right now, is to give the economy the help it needs. Now is not the time to worry about the deficit.

Canada is even better able to implement this advice than the U.S. Canada has spent the past 15 years with no deficits, and has consistently paid down its debt. We have paid the price for all this "fiscal prudence" in crumbling infrastructure, reduced services, poor health care and increased provincial and local taxes. Now is time to reap some of the rewards of all that "saving for rainy day." It is raining hard, and it looks like a long downpour. Time to spend some money on umbrellas.

But I doubt the Conservatives will be open to that approach. They are addicted to small government and worship "balanced budgets" at all costs. Let's hope they loosen up a bit.


Anonymous Anonymous said...

They will have big deficits but they will be "unintended".

5:40 pm  

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