Here we spend again, I mean, “go” again.
Two of America’s leading liberal economists, Paul Krugman and Larry Summers, want Washington to start spending more—probably much, much more—to boost the sputtering U.S. economy. Extremely low interest rates, they argue, both allow government to borrow cheaply and signal a deep hibernation by bond market vigilantes unconcerned by federal debt levels.
Lots of potential reward with little potential risk—or so Krugman and Summers argue.
Their proposal raises many questions and issues:
1. How much? The 2009 stimulus cost $831 billion, not counting borrowing costs. Without it, according to the Congressional Budget Office, the unemployment rate today would be 0.1 to 0.8 percentage point lower. Using, charitably, the most favorable CBO estimate, we are talking about $100 billion per tenth of a percentage point. So how much is enough for Krugman and Summers, $800 billion? $900 billion? $1 trillion? Or is the sky the limit?
2. What would the money be used for? Summers says in his op-ed that it would be “amazing if there were not many public investment projects” that would pay for themselves by “expanding the economy’s capacity or its ability to innovate.”
First, I would like to vet that short list. Second, is a check from Washington the best way to make these supposed projects happen? Third, what happened to Summers’s famous admonition that stimulus should be “timely, targeted, temporary?” These projects would likely take some time to get going. And if you believe the economic forecasts from the Obama White House, the economy is—yet again—approaching a mini-boom: 3% GDP grow this year, 3.0% in 2013, 4.0% in 2014, 4.2 in 2015, 3.9% in 2016, 3.8% in 2017. Now, I don’t place much stock in those predictions from Summers’s old pals on Team Obama, but he just might.
3. Would the bond vigilantes really stay asleep? Krugman and Summers are preternaturally confident that another big step-up in U.S. indebtedness would have no effect on our ability to borrow. That’s a big assumption, argues AEI’s Desmond Lachman: “An important lesson that the U.S. should be drawing from the Greek experience is how mistaken it is to be guided by low market interest rates. Since it might be recalled that as late as 2009, when it should have been obvious to all that Greece’s public finances were on an unsustainable path, the Greek government was able to raise as much long-term money as it liked at a mere 0.2 percentage points above the rate at which Germany could borrow such money. It might also be recalled how quickly markets turned on Greece and how soon a country that had no difficulty in borrowing from the international capital market at unusually favorable terms found itself totally shut out from that very same market.”
And let’s also keep in mind that the last time Summers tried to outsmart financial markets he lost $2 billion for Harvard’s endowment fund.
4. Might not more debt actually hurt long-term U.S. growth? A new paper from Kenneth Rogoff, Carmen Reinhart, and Vincent Reinhart finds that very high debt levels of 90% of GDP are a long-term burden on economic growth that often lasts for two decades or more: “The average high-debt episodes since 1800 last 23 years and are associated with a growth rate more than one percentage point below the rate typical for periods of lower debt levels. That is, after a quarter-century of high debt, income can be 25% lower than it would have been at normal growth rates.”
5. What about taxes? One huge mistake the high-tax EU has made is making nearly half its austerity program come in the form of even higher taxes. Not only should the U.S. not be raising taxes, we should be cutting them. Our corporate tax is so high that cutting it to 25% from 35% might well pay for itself—not to mention boosting business and investor confidence.
The U.S. economy has been malfunctioning since 2006. Shouldn’t it finally be time to address the deep problems of an anti-growth tax code, economy-stifling regulations, and out-of-control spending?