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Krugman: Yes, We Have To Fix The Deficit Eventually–But Not Now

Henry Blodget

Nobel Prize-winning economist Paul Krugman has argued clearly and consistently over the past five years that U.S. government spending is critical to our economic recovery and that cutting spending now to reduce the deficit would be a disastrous mistake.

Related: U.S. Still Suffering Depression Conditions: Paul Krugman

For taking this position, Krugman has been castigated by those who blame the depression on fiscal irresponsibility and runaway government spending. The way to fix the economy, those folks argue, is to immediately slash government spending, reduce the deficit, and restore "confidence" among the country's business leaders.

In the early years of the recovery, there was widespread support for the latter view. But in the past few years, as countries like the UK and Greece have tried the "austerity" remedy, it has become clear that this only compounds the problem. By reducing government spending, country's reduce employment and GDP. And by reducing employment and GDP, they also reduce tax revenue, which increases the deficit. So they have to cut more spending. And so on.

Meanwhile, the outcome that such "deficit hawks" keep worrying about--skyrocketing interest rates as our creditors conclude that our spending is out of control--has yet to materialize. We continue to be able to borrow at extraordinarily low rates of interest. And our government spending, though considerably higher than our government tax revenue (thus the budget deficit), is still relatively low as a percent of GDP when compared to that of other developed countries.

Related: Health Care Spending Cuts are Key to Controlling the Deficit: Alan Blinder

Importantly, Paul Krugman does not think we can ignore our budget deficit forever. He agrees that the so-called "entitlement" programs--especially Medicare and Medicaid--are on a growth path that will eventually cause serious problems if they are left unaddressed.

But serious problems in the future are not serious problems today. And Krugman thinks that now would be a disastrous time to slash spending to fix a problem that is not yet really a problem.

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