Tax Analysts Blog

Fear of Borrowing

Posted on Jan 29, 2010

Paul Krugman's column this morning echoes the very sensible economic advice we have heard for decades: "We should combine actions that create jobs now with other actions that reduce deficits later."

Unfortunately, because of the 2007-09 financial meltdown, many countries can't wait until later. So jobs must be sacrificed now. This startling development is reported in today's Wall Street Journal ("Europe's Budgets Face Pressure"). The intensifying Greek debt crisis (deficit = 12.7% of GDP in 2009) is reverberating across the continent--placing an immediate burden on its high-deficit neighbors like Ireland (11.7% of GDP), Spain (10.0%), U.K. (9.9%), and Portugal (9.3%). The article quotes one analyst saying something they never taught us in economics school: "There is a clear danger that countries are being forced by the markets and rating agencies into tightening fiscal policy too quickly."

This leads us to another new fact of macroeconomic life: we need to keep deficits low when the economy is strong so that we will have the debt capacity to fight the next recession.

Meanwhile back in the USA (deficit = 9.9% of GDP in 2009) we don't yet have to fear anything from the rating agencies. Fears of more government borrowing are restraining willingness to use fiscal policy to help create what everybody tells me is our number one priority. (Whether these fears are rational or irrational is hard to say because nobody in fact knows what limits there should be on the outstanding U.S. government debt). If it were true, as Republicans like to claim, that fiscal stimulus does not work, it would be easy to just say no. But it just ain't so.

All this points to a macroeconomic approach for the United States that its political system is ill-equipped to provide. Rather than a half-assed jobs bill (now under consideration in both houses) and a half-assed effort at long term deficit reduction (pay-go rules and a commission), it would be better to be bold on a jobs/stimulus bill and even bolder about long-term deficit reduction.

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