Brad DeLong says that extraordinarily low interest rates, the absence of any hint of expected inflation, and the continuing difficulties in labor markets make the case for more stimulus spending very strong:
We Need Bigger Deficits Now!, by Brad DeLong: We Are Live at The Week: As the disappointing May job numbers confirm, this is still an exceptional time—a time in which many of the normal rules of the Dismal Science are changed and transformed. It is a time for not normal economics but rather “depression economics.” The terms on which the U.S. government can borrow now are exceptionally advantageous. And because of high unemployment the benefits of boosting government purchases and cutting taxes right now are exceptionally large.
The result is that the costs of borrow-and-spend policies are overturned for the short run... In normal times, a boost to government purchases or a cut in taxes ... raises interest rates, which crowds out productivity-increasing private investment spending and, dollar for dollar, leaves us poorer after the effect of the stimulus ebbs. The borrowing must then must be financed at a significant interest rate, and thus paid for with higher taxes, which reduce incomes by increasing the wedge between the private rewards and the social benefits of expanded production. ...
Normally, only government spending initiatives or tax cuts that promise a high value for the dollar are worth undertaking, but things are different now. However, right now, as best we can tell, an increase in federal spending or a cut in taxes will produce (in the short run) no increase in interest rates and hence no crowding-out of productivity-increasing private investment. Indeed, government spending that adds to firms’ current cash flow may well boost private investment and so leave us, dollar for dollar, richer after the effect of the stimulus ebbs.
Because our debt today can be financed at extremely low interest rates—1.83 percent if financed via 30-year TIPS, and even less in expected real interest if financed over a shorter horizon. In normal times, only government spending initiatives or tax cuts that promise a high value for the dollar are worth undertaking. Now, however, things are very different. Let’s run through the arithmetic. [lots or arithmetic]...
Now, net all this out.
The increased cash flows to businesses boost future private-sector incomes by $1 billion a year. The costs of amortization reduce them by $1.07 billion a year. The net cost? $70 million per year. So to gain $150 billion of increased production and incomes this year we incur a $70 million a year cost going forward. That means that using expansionary fiscal policy to boost output today is an investment worth doing at any interest rate greater than 0.05 percent per year.
That is not quite a free lunch—they take away my union card as an economist if I start claiming that free lunches exist. But it is certainly a value meal. We are getting more income and employment now—when we really need it—in return for sacrificing only a tiny bit of production each year in the future, when we believe that we will be richer and will mind the reduction significantly less.
The Limits of Depression Economics:
Thus it is a no-brainer that we ought to be doing more fiscal stimulus. ... The argument for more spending is airtight as long as the arithmetic holds out. That is, until:
- further increases in the deficit lead to rising expectations of inflation, leading the Federal Reserve to raise short-term interest rates, which then crowds out private-sector investment spending;
- further increases in the deficit lead to pressure on the federal government’s debt capacity, so that we can no longer finance additional federal government debt at such extraordinarily advantageous interest rates.
Back in December 2008 the incoming Obama National Economic Council feared that an increase in the proposed size of the Obama stimulus program, the ARRA, from $800 billion to $1.2 trillion would bring these factors into play. It is now clear that they were overly pessimistic, in large part because they were overly optimistic about the state of the economy.
Right now, bad politics is undermining good policy, hurting the American economy and legions of unemployed workers. It is long past time for another stimulus package.