Greg Mankiw must know better than he indicates in his analysis of debt in today's NYT. He complains that efforts to use large-scale stimulus to boost the economy may put excessive burdens on our children.
Dean’s accounting is a must read and makes sense if one accepts the fixed interest rate version of the Keynesian multiplier. Paul Krugman has a similar take and explains:
Right now there’s intense debate about how aggressive the United States government should be in its attempts to turn the economy around. Many economists, myself included, are calling for a very large fiscal expansion to keep the economy from going into free fall. Others, however, worry about the burden that large budget deficits will place on future generations. But the deficit worriers have it all wrong. Under current conditions, there’s no trade-off between what’s good in the short run and what’s good for the long run; strong fiscal expansion would actually enhance the economy’s long-run prospects. The claim that budget deficits make the economy poorer in the long run is based on the belief that government borrowing “crowds out” private investment — that the government, by issuing lots of debt, drives up interest rates
Paul seems to think we are in a liquidity trap where monetary policy is powerless and fiscal policy’s potency is not offset by this crowding-out effect. Ben Bernarke appears to be saying similar things:
Federal Reserve Chairman Ben Bernanke said Monday that further interest-rate cuts are "certainly feasible," but he warned there are limits to how much such action would revive an economy likely to stay weak well into next year. The Fed's key interest rate now stands at 1 percent, a level seen only once before in the last half-century … "Although further reductions ... are certainly feasible, at this point the scope for using conventional interest rate policies to support the economy is obviously limited," Bernanke said in the speech. The Fed can lower its key rate only so far — to zero — and it's getting ever closer to that threshold. Bernanke said there are other ways that the Fed might bolster economic activity. The Fed, for instance, could buy longer-term Treasury or agency securities on the open market in substantial quantities, he said. This might lower rates on these securities, "thus helping to spur aggregate demand," Bernanke said. Given the limits to how low the Fed can go in reducing interest rates, the central bank over the past year has resorted to a flurry of other radical — and often unprecedented actions — with the hope of busting through credit jams and getting financial markets operating more normally.
This Federal Reserve deserves a lot of credit for doing what it can to alleviate the recession – but clearly it needs help from the fiscal side as well. Even Greg Mankiw agrees with this Keynesian premise. Let’s hope Congress goes along with the President-elect on this one.