Paul Krugman on Spending

Question: How can you encourage spending with massive deficits?

Paul Krugman: Well, you know, we’re talking about even the extravagant spending proposals, which is what I’m calling for, we’re talking about [IB] 4% of GDP. Now we have debt… I should check that number. I believe we have a debt GDP ratio on the 50 percentage range right now. That’s not good. It’s been rising in the absence of a major war, which is not supposed to happen, but I look at other advanced countries, they’ve managed to have, or ourselves, we had a debt to GDP ratio of 125% at the end of World War II, and paid it down and there was never a question about the good faith in credit of the US government. Even advanced countries with fairly weak governments, Belgium, Italy, have managed to have debt equal to or greater than GDP, so we have a lot of running room as long as there’s a reasonable presumption that we will, in the end, do what’s necessary to bring our finances back under control. It’s not that we can’t afford to spend this much, and the alternative of not providing the stimulus is just to run the risk of a truly frightening slump in the economy.

Krugman describes how we did it in WWI and why we can do it now, even with massive deficits.

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