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Politics : Liberalism: Do You Agree We've Had Enough of It?
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From: TimF10/15/2009 9:15:45 PM
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...The problem of running big deficits in, say 2010 and 2011 is that it makes returning to lower deficits in 2012 contractionary (assuming you believe that deficit spending is expansionary in the first place). So now you have to keep running big deficits in 2012. That brings you to 2013. Do you want a contraction then? No, so...

DeLong is of course living in the macroeconomic world where we do not worry about Recalculation. Instead, we all work in one giant GDP industry, and for some mysterious reason many of our GDP factories have shut down, so that government must build and operate some GDP factories to keep us all employed.

From the Recalculation perspective, the economy needs to shift resources out of some sectors and into others. The government is either (a) permanently shifting resources from the private sector to government or (b) temporarily shifting resources from the private sector to government. If it is doing (a), then we are not facing mere temporary deficits but permanent increases in government spending, and eventually we will have to figure out how to pay for them. If it is doing (b), then the Recalculation problem isn't really being solved. Instead, at best the government is redistributing the pain from the reallocation process out of the present and into the future. People who otherwise would be unemployed can find temporary work on government projects, but when those projects expire they will go back to being unemployed. This is what makes the fiscal exit strategy so problematic.

econlog.econlib.org
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