A time to spend

Says Krugman:

It’s now clear that rescuing the banks is just the beginning: the nonfinancial economy is also in desperate need of help.

And to provide that help, we’re going to have to put some prejudices aside. It’s politically fashionable to rant against government spending and demand fiscal responsibility. But right now, increased government spending is just what the doctor ordered, and concerns about the budget deficit should be put on hold.

It's somewhat counterintuitive but true: federal deficit spending is good in a recession, because it gets money flowing in the economy. Moreover, since lenders have lost confidence in the private banks, they all want to lend to the federal government--even if it means lending at an interest rate of a fraction of a percent. So the government essentially has a credit card with a hyper-low interest rate of, like, 0.15% that it can use to get money flowing in the economy in various ways: by increasing unemployment benefits, by cutting taxes, and by investing in infrastructure improvements. The idea is that you keep spending until the economy recovers, at which point tax revenues also recover and you can balance the budget and pay down the debt.