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Fiscal War

Former TNR editor Michael Kinsley warns in the Washington Post today of increased deficits from the stimulus. The loans to fund these deficits, Kinsley notes, will eventually have to be paid back, and he suggests that the United States will attempt to reduce the cost of this debt through the kind of double-digit inflation that wrecked the economy in the late 1970s. It’s a clever argument, and one that Republican conservatives have been making, but it’s wrong, and will lead us into a deeper crisis.

In a similar vein, another former esteemed colleague Clay Risen, now happily writing for “The Plank,” takes Paul Krugman’s column today as demonstrating the limits of government in stemming the downturn. Like Kinsley, Risen seems to be suggesting that we should be wary of largescale government spending.

Here’s my argument. What I would take from Krugman’s column is what he says about the Great Depression--that we only finally pulled out it due to an “enormous war.” True enough, but that’s an argument for undertaking what I’ve called the “fiscal equivalent of war,” not for waiting for the market eventually to correct itself as it did in the 19th century by massive reductions in employment and wages. It’s not even clear that this kind of correction would occur in the kind of economy we have today.

Wouldn’t massive spending create huge government debts? Yes, certainly, but public spending can also raise national income, and that’s the only way to pay off these debts. If we try to reduce these debts by running government surpluses now, or by reducing the deficit, we’ll lower national income and make it more difficult to reduce our debt. That’s the national equivalent of the paradox of thrift. 

What about inflation? The double-digit inflation of the ‘70s was due to a) deficit spending in the late in the late ‘60s during full employment from the Vietnam War, and b) the spike in oil prices caused by the creation of the OPEC cartel and by the U.S. abandonment of Bretton Woods. It was not due to deficit spending during a sharp downturn. The danger now is deflation not inflation. I look forward to the day when we are worrying again about inflation. That will mean the storm is past.

But isn’t there some reason to worry about growing deficits? Yes, internationally, which Kinsley doesn’t mention. If other countries stop buying out Treasury bills, then interest rates will rise and potentially choke off a recovery. But we are in a curious position now of being the safe harbor for other nations’ money. Interest rates remain low on Treasury bills. In other words, we are in a peculiar moment, where we can and must try to spend ourselves out of this potential depression. That’s why, even while applauding the Obama administration’s political finesse in parrying Republican intransigence and folly, I worry that it is not doing enough.

--John B. Judis