The world would have been in big trouble without the budget deficit created by massive fiscal stimulus, Nobel laureate Paul Krugman writes in The New York Times.
The reason why is that the government’s deficit has been matched by a surplus of private savings, he says.
Krugman cites a note that Goldman Sachs economist Jan Hatzius sent to clients:
“The private sector financial balance, defined as the difference between … private income and private spending, has risen from negative 3.6 percent of GDP in the third quarter of 2006 to positive 5.6 percent in the first quarter of 2009Q.”
Putting that in context, Hatzius says, “This 8.2 percent of GDP adjustment is already by far the biggest in post-war history.”
The upshot of all is that “government deficits, mainly the result of automatic stabilizers rather than discretionary policy, are the only thing that has saved us from a second Great Depression” caused by excess savings, Krugman writes.
“This says that absent the absorbing role of budget deficits, we would have had a full Great Depression experience. What we’re actually having is awful, but not that awful, and it’s all because of the rise in deficits. Deficits, in other words, saved the world.”
Others aren’t quite so sanguine about the exploding deficit.
“We need fiscal stimulus in the short term, but we need measures to bring the deficit under control in the long term,” Harvard economist Jeff Frankel tells Moneynews.
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