Paul Krugman writes in the New York Times:

But the deficit worriers have it all wrong. Under current conditions, there’s no trade-off between what’s good in the short run and what’s good for the long run; strong fiscal expansion would actually enhance the economy’s long-run prospects.

The claim that budget deficits make the economy poorer in the long run is based on the belief that government borrowing “crowds out” private investment — that the government, by issuing lots of debt, drives up interest rates, which makes businesses unwilling to spend on new plant and equipment, and that this in turn reduces the economy’s long-run rate of growth. Under normal circumstances there’s a lot to this argument.

Sure, a deficit is not a bad thing necessarily. I have a mortgage and I would definitely call that “good” debt. The government can take on good debt. But the problem is that usually goverment deficits are driven by bad debt … like trillion dollar bailouts.

Krugman:

But right now we have a fundamental shortfall in private spending: consumers are rediscovering the virtues of saving at the same moment that businesses, burned by past excesses and hamstrung by the troubles of the financial system, are cutting back on investment. That gap will eventually close, but until it does, government spending must take up the slack. Otherwise, private investment, and the economy as a whole, will plunge even more.

But the question is (a) how much will this cost? and (b) can it really spare us a recession? I doubt the payoff is there and I think the government is in dangerous territory taking such a flippant attitude toward debt. Isn’t that what got us here in the first place?