Derek pointed out this morning that Krugman seems to have an interesting point that, during the Great Depression, the U.S. public was concerned about too much deficit spending -- just like they are now. Back then, they tried to tighten fiscal policy, and things got even worse. As a result, Krugman is praying that Obama and Congress will ignore the people and trust brilliant Keynesian economists like him. I'd argue, however, that a few key things make current deficit spending fears more legitimate than they were in the 1930s.
For starters, let's compare our current national debt to 1935, when the stats Krugman cites indicate 70% of people wanted to reduce the national debt. It was a measly $28.7 billion. As of May 31, 2009 it was $11.3 trillion.
Let's take inflation into account. In May 2009 dollars, the 1935 national debt would have been $446 billion. Closer, but it's still a mere 3% the size of our current U.S. debt.
Another measure people like is national debt as a percentage of GDP. In 1935, the national debt was 39% of GDP; currently, it's very close to 80%.
My point here is that it's easy to argue that the public of the 1930s was out of line in complaining so loudly about the national debt. These days, those complaints might not be quite as naïve as Krugman thinks. Particularly since there is a fear that our international investors at some point might begin to question whether our debt levels are sustainable, and stop buying Treasuries. That's a genuine economic concern, no matter how silly Krugman thinks it is to worry about the national debt.
The other legitimate complaint is about how the federal government is increasing spending. So far, the incredibly expensive stimulus package seems to have had very marginal results. Americans may also balk at the idea that universal healthcare is utterly necessary right now, if that means adding another trillion dollars to the national debt, which could be perceived very negatively by already wary international investors who buy our debt. I doubt China wants to front us for the money to pay for our universal healthcare.
I don't think a majority of people have a problem with deficit spending if they believe that spending will actually help the economy during a recession. For example, if you tell people that we were going to add several hundred billion to the national debt because we're lowering corporate or personal taxes, I suspect a lot more people would probably say that's okay -- so long as we begin chipping away once things improve. Such a move can be sure to help the economy.
But if you tell those same people the increase in debt will occur because of potentially wasteful, ineffective spending or even national healthcare, they'd probably tell you to wait until we can afford it. Like them or not, many of FDR's programs were specifically targeted at economic problems. It seems like a lot of spending coming out of Washington these days is not.
The majority of those calling for fiscal responsibility aren't doing so because they are against all spending. They're just against stupid spending, or spending that won't do much to improve our current economic situation.
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