Paul Krugman advocates an additional stimulus program, along the lines of the $787 billion stimulus program enacted last February. He has not, to my knowledge, indicated how large a program he wants, but presumably it would be very large, perhaps equal in size to last year's program. He realizes that the nation cannot continue running up its debt without serious long-run consequences, but believes that now is not the time to reduce deficits by higher taxes or lower government spending; that we should wait for the economy to recover, and then address our debt through economizing measures, primarily in health care--he believes that the Obama health care plan would reduce the federal deficit.
He is not being realistic. There is almost certainly not going to be another stimulus program of any magnitude as long as the recovery, anemic though it seems to be, doesn't give way to a 1937-style second depression. And there aren't, in all likelihood, going to be any significant spending cuts; the perfection of interest-group politics will see to that. There is no way, it seems to me, that adding 30 or 40 or 50 million people to the health insurance roles (in the event that an ambitious health care program is enacted after all) can avoid an increase in the costs of health care borne by the government, because those people will demand more care once they have insurance. There won't be offsetting cuts in Medicare because the old people won't stand for any reduction in their treatment options. There aren't going to be big tax hikes, either, to pay off the debt; neither political party dares to raise taxes, beyond letting a small part of the Bush tax increases expire on schedule in 2011. Because spending won't fall or taxes rise, the public debt will rise, so the interest on it will rise, and its rise will be compounded by higher interest rates as the debt grows. Rising interest expense will combine with rising Medicare and Social Security costs to further compound the debt. It looks as if, mainly by virtue of the Bush deficits and the costs (in reduced tax collections and increased welfare expenses, bailouts, and stimulus), the public debt will reach $10 trillion in a couple of years.
I conclude that there probably is only one way out of our fiscal dilemma, apart from default, devaluation, or runaway inflation, and that is to increase the rate of economic growth to the point at which a growing public debt falls, or at least does not increase further, in percentage of GDP. But measures to increase economic growth must satisfy four criteria: that they not interfere with the economic recovery; that they not put the government in the futile position of trying to pick tomorrow's industry winners and investing in them ("industrial policy"); that they not cost too much, as that will contribute to the deficit, because the costs are likely to be incurred before the benefits are obtained; that they be politically feasible.
With these constraints in mind, I suggest the following candidates for stimulating the growth of the economy.
1. Remove all limits on the immigration of highly skilled workers, or persons of wealth. (This should be done gradually, so as not to increase unemployment while the unemployment rate remains very high.)
2. Decriminalize most drug offenses in order to reduce the prison population, perhaps by as much as a half, which will both economize on government expenditures and increase the number of workers. (Again and for the same reason, phase in gradually.)
3. Curtail medical malpractice liability, which increases medical costs gratuitously (because the courts are very poor at identifying actual malpractice) and, more important, engenders a great deal of very costly, and largely worthless, "defensive medicine."
4. Augment the admirable efforts being made by the Obama administration to improve public education.
5. Increase investment in the treatment of mental illness, which disables people during their productive years.
6. Simplify the federal tax code.
This list is merely suggestive, and could surely be improved. It is meant to suggest a more productive alternative to the current efforts at comprehensive health care reform, unpromising job subsidy and mortgage relief programs, and ambitious financial regulatory reform--all measures that are likely to slow the recovery by making the economic environment more uncertain and our fiscal problems more acute.