Paul Krugman, most prominent current advocate of Keynesian Fiscal Stimulus This

Question

Paul Krugman, most prominent current advocate of Keynesian Fiscal Stimulus
This article sums up the arguments for fiscal stimulus well:

http://www.nytimes.com/2011/09/05/opinion/the-fatal-distraction.html?_r=3&hp

Note carefully his position on deficit spending:

"The deficits we’re running right now — deficits we should be running, because deficit spending helps support a depressed economy — are no threat at all."

Hence the debate: those who think deficits (and the $15 Trillion national debt) are a big problem, well, they're going to have 'words' with guys like this!

What do you think: more fiscal stimulus can help with unemployment, or should we be worried about deficits?

Explanation / Answer

You can answer this from a historical point of view or a Keynesian point of view. A Keynesian point of view agrees with Krugman. Krugman is a Keynesian. Deficits are good because they help support a depressed economy during a recession by increasing government spending and keeping taxes low. Krugman's recommendation is simple. Deficits don't matter. Spending money makes everyone rich. From a historical perspective, running huge deficits has been detrimental to economic outcomes. Deficits during World War II increased the GDP but resulted in massive shortages of basic goods like food that required government rationing. The Vietnam deficits had the same effect to a lesser degree. Arguably the best period of economic growth and prosperity in the 20th century US occurred in the 90's while the government was cutting the deficit. This trend reversed, however, with the deficits created by the invasion of Iraq and has not return to previous growth levels since deficits have remained high during the Bush and Obama administrations.

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