Tuesday 22 June 2010

Keynes Is Still Right: Paul Krugman on Recover and Deficits, with Added Info from Jim Flaherty

With the G-8 and the G-20 coming to Canada at the end of the week, the chattering classes are talking about the danger of deficits and the problems of the banking system. The latter does bear some serious thought. But the former should be put aside for the duration.

As Nobel laureate Paul Krugman wrote Monday : "Spend now, while the economy remains depressed; save later, once it has recovered. How hard is that to understand?" After going through a short lesson in economics, he continues: "Penny-pinching at a time like this isn’t just cruel; it endangers the nation’s future. And it doesn’t even do much to reduce our future debt burden, because stinting on spending now threatens the economic recovery, and with it the hope for rising revenues."

Krugman's reasoning was corroborated yesterday by Canada's Finance Minister Jim Flaherty, who has been running around for the last little bit, telling countries they have to cut their deficits. But, ironically, he also said in New York that Canada should be able to eliminate its deficit a year earlier than thought--in 2015--because of we're doing better in the fight for economic recovery.

Which message will be heard: the one that Flaherty appears to be pushing or the one that Krugman expounds and for which Flaherty (probably inadvertently) provides strong evidence?

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