Only one group of economists has a coherent response: Keynesians. Led by New York Times columnist Paul Krugman, they argue that the deficits haven’t been large enough. If consumers and businesses aren’t spending enough to revive the economy, government must substitute. Its support would be temporary until more jobs and profits strengthened private spending. Sounds convincing.
But it collides with the 1960s’ legacy. Running routine deficits meant that the federal debt (all past annual deficits) was already high before the crisis: 41 percent of the economy, or gross domestic product (GDP), in 2008. Huge deficits have now raised that to about 70 percent of GDP; Krugman-like proposals would increase debt further. It would approach the 90 percent of GDP that economists Kenneth Rogoff of Harvard and Carmen Reinhart of the Peterson Institute have found is associated with higher interest rates and slower economic growth…
Now, imagine that the country had adhered to its balanced-budget tradition before the crisis. Some deficits would have remained, but the cumulative debt would have been much lower: plausibly between 10 percent and 20 percent of GDP. There would have been more room for expansion. Balancing the budget might even have forced Congress to face the costs of an aging society.
