Starving the economy during the recovery period risks a relapse and, further, this can cause long-run damage. Getting the economy back to the best possible health will require addressing our long-run budget issues, but best to wait until the economy has recovered its health before starting it on a strict diet:
Now and Later, by Paul Krugman, Commentary, NY Times: Spend now, while the economy remains depressed; save later, once it has recovered. How hard is that to understand?
Very hard, if the current state of political debate is any indication. All around the world, politicians seem determined to do the reverse. They’re eager to shortchange the economy when it needs help, even as they balk at dealing with long-run budget problems. But maybe a clear explanation of the issues can change some minds. So let’s talk about the long and the short of budget deficits. ...
America has a long-run budget problem. Dealing with this problem will require, first and foremost, a real effort to bring health costs under control — without that, nothing will work. It will also require finding additional revenues and/or spending cuts. As an economic matter, this shouldn’t be hard..., a modest value-added tax, say at a 5 percent rate, would go a long way toward closing the gap, while leaving overall U.S. taxes among the lowest in the advanced world.
But if we need to raise taxes and cut spending eventually, shouldn’t we start now? No, we shouldn’t.
Right now,... a severely depressed economy ... is inflicting long-run damage. Every year that goes by with extremely high unemployment increases the chance that many of the long-term unemployed will never come back to the work force, and become a permanent underclass. Every year that there are five times as many people seeking work as there are job openings means that hundreds of thousands of Americans graduating from school are denied the chance to get started on their working lives. And with each passing month we drift closer to a Japanese-style deflationary trap.
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.
So now is not the time for fiscal austerity. ...[B]udget deficit should become a priority when, and only when, the Federal Reserve ... can offset the negative effects of tax increases and spending cuts by reducing interest rates.
Currently, the Fed can’t do that, because the interest rates it can control are near zero, and can’t go any lower. Eventually, however, as unemployment falls ... the Fed will want to raise rates to head off possible inflation. At that point we can make a deal: the government starts cutting back, and the Fed holds off on rate hikes so that these cutbacks don’t tip the economy back into a slump.
But the time for such a deal is a long way off — probably two years or more. The responsible thing, then, is to spend now, while planning to save later.
As I said, many politicians seem determined to do the reverse. Many members of Congress, in particular, oppose aid to the long-term unemployed, let alone to hard-pressed state and local governments, on the grounds that we can’t afford it. ... Yet efforts to control health costs were met with cries of “death panels.”
And some of the most vocal deficit scolds in Congress are working hard to reduce taxes for ... heirs to multimillion-dollar estates. This would do nothing for the economy now, but it would reduce revenues by billions of dollars a year, permanently.
But some politicians must be sincere about being fiscally responsible. And to them I say, please get your timing right. Yes, we need to fix our long-run budget problems — but not by refusing to help our economy in its hour of need.