The federal budget deficit isn’t a looming disaster for the U.S. economy, and investors should be wary of contrary claims, writes Nobel Prize winning economist Paul Krugman.
In his column in The New York Times, Krugman, a professor of economics at Princeton University, writes that “contrary to what you often hear, the large deficit the federal government is running right now isn’t the result of runaway spending growth.”
Rather, Krugman contends, more than half of the deficit was caused by the ongoing economic crisis, which has led to a plunge in tax receipts, required federal bailouts of financial institutions, and been met — properly — with interim measures to stimulate growth and support employment.
“The deficit threatens economic recovery, we’re told; it puts American economic stability at risk; it will undermine our influence in the world,” writes Krugman.
“Yet they aren’t facts. Many economists take a much calmer view of budget deficits than anything you’ll see on TV. Nor do investors seem unduly concerned: U.S. government bonds continue to find ready buyers, even at historically low interest rates.”
Krugman reckons that running multi-trillion dollar federal deficits in the face of the “worst economic slump since the 1930s” is really the right thing to do.
“If anything, deficits should be bigger than they are because the government should be doing more than it is to create jobs,” writes Krugman.
“True, there is a longer-term budget problem. Even a full economic recovery wouldn’t balance the budget, and it probably wouldn’t even reduce the deficit to a permanently sustainable level.”
Deficits are prevalent on the state level too, not just in Washington.
The Philadelphia Inquirer reports that new Gov. Chris Christie is planning for measures to deal with the debt level in New Jersey.
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