While many say the U.S. should be focusing on long-term solutions to its debt problems, Nobel Prize-winning Economist Paul Krugman says that a more pressing need is a short-term fix for its economic engine.
“When you’re bleeding profusely from an open wound, you want a doctor who binds that wound up, not a doctor who lectures you on the importance of maintaining a healthy lifestyle as you get older,” Krugman writes in a recent New York Times column. “When millions of willing and able workers are unemployed, and economic potential is going to waste to the tune of almost $1 trillion a year, you want policy makers who work on a fast recovery, not people who lecture you on the need for long-run fiscal sustainability.”
Krugman says the economic debate has been “hijacked” by politicians who seek to use the current troubles as an opportunity to push their own agendas. He says the burgeoning deficits the U.S. is seeing are in part due to natural cycles — when a crisis hits, he says, the economy shrinks and revenue plunges. “What would a real response to our problems involve?” he asks. “First of all, it would involve more, not less, government spending for the time being — with mass unemployment and incredibly low borrowing costs, we should be rebuilding our schools, our roads, our water systems and more. It would involve aggressive moves to reduce household debt via mortgage forgiveness and refinancing. And it would involve an all-out effort by the Federal Reserve to get the economy moving, with the deliberate goal of generating higher inflation to help alleviate debt problems.”
The market’s recent action has shown what investors are really worried about, Krugman says. While many feared Standard & Poor’s downgrading of U.S. debt would rile the debt markets and stoke fears of U.S. defaults, investors actually flocked to Treasury bonds after the downgrade, he notes. “What the market was saying — almost shouting — was, ‘We’re not worried about the deficit! We’re worried about the weak economy!'” Krugman writes. “If the downgrade of U.S. debt had any effect at all, it was to reinforce fears of austerity policies that will make the economy even weaker.”