In his column in The New York Times, Mugged by the Moralizers, Paul Krugman gives the usual explanation for increased government spending during a recession.
The key thing to bear in mind is that for the world as a whole, spending equals income. If one group of people — those with excessive debts — is forced to cut spending to pay down its debts, one of two things must happen: either someone else must spend more, or world income will fall.
Yet those parts of the private sector not burdened by high levels of debt see little reason to increase spending. Corporations are flush with cash — but why expand when so much of the capacity they already have is sitting idle? Consumers who didn’t overborrow can get loans at low rates — but that incentive to spend is more than outweighed by worries about a weak job market. Nobody in the private sector is willing to fill the hole created by the debt overhang.
So what should we be doing? First, governments should be spending while the private sector won’t, so that debtors can pay down their debts without perpetuating a global slump. Second, governments should be promoting widespread debt relief: reducing obligations to levels the debtors can handle is the fastest way to eliminate that debt overhang.
He further goes on to mention the President’s failing:
John Boehner, the House minority leader, was widely mocked last year when he declared that “It’s time for government to tighten their belts” — in the face of depressed private spending, the government should spend more, not less. But since then President Obama has repeatedly used the same metaphor, promising to match private belt-tightening with public belt-tightening. Does he lack the courage to challenge popular misconceptions, or is this just intellectual laziness? Either way, if the president won’t defend the logic of his own policies, who will?
Perhaps it is time to look for better explanations if this one seems to fall on deaf ears.
Of course my explanation probably won’t fare much better.
The American Society of Civil Engineers in its 2009 Report Card for America’s Infrastructure estimates that we need to spend $2.2 trillion dollars over the next 5 years repairing our infrastructure just to prevent it from failing. If we know we need to spend this money at some point in the future, when would be the best time to spend it? I claim that now is the best time. When private spending is underperforming, there is no better time for public spending. There is little competition for the borrowing capacity. The infrastructure use is at the lowest ebb that it is going to be (not that it is low, but relatively it is). There is idle labor, equipment, and raw materials, so construction prices are low. There is little risk of inflation because there is so much idle capacity in the system
It is much better to do the work now than wait until the economy booms. Borrowing will be expensive then as the private sector is competing for loans as they are borrowing to increase capacity. Workers will be scarce and therefore expensive. Raw materials will be costlier. Adding government spending to private spending at that time will stoke the fires of inflation.
Why would we pass up such a golden opportunity to do work that we know has to get done?