Krugman contemptuously ridicules Paul Ryan's proposed budget because it freezes discretionary spending in the future, as if this modest fiscal restraint is insane. How is this sustainable?
Government can choose one of two options:
1) The government can reduce spending at the same time as households and businesses (which is what Ryan's plan amounts to), resulting in a fall in aggregate demand and concomitant rise in spending due to increased welfare provision and falls in tax revenue due to falls in GDP.
2) The government can borrow to increase spending, thus stimulating demand and increasing GDP, thus increasing tax revenues, allowing the government to service the debt it has incurred.
"In a private company, if you are losing money you cut until revenues meet expenses"
Clearly you have never worked in a high-tech startup.
Many businesses "lose" money for years before they start making profits. They borrow money to invest in future growth, much as the US government can borrow to invest in future growth.
Wednesday, August 11, 2010
I left the following comment at this post on Falkenblog, which was itself in response to this post by Paul Krugman: