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View Diary: America Turning into Japan (89 comments)

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  •  Actually we CAN spend our way out (0+ / 0-)

    We can, we just won't.  But if we would, the whole mess could be ended pretty easily.

    It does matter what we spend on, but there are no shortage of productive things we could spend on.  There are estimates that we need infrastructure investments of as much as $2 trillion.  Now is when we should be making some of those investments.

    Even if we were at full employment though, the optimal policy right now might still be a deficit of at least half a trillion.  This is because global growth prospects are so high.  So long as potential growth is higher in other countries, we should be running trade deficits, at a percentage of GDP approximately equal to the difference in potential growth rates.  So really, trade deficits of over $450B per year right now would be sustainable, and in our interest.  And you can add another roughly $250B which would be financed by domestic growth.

    But with an output gap of $1 trillion on top of that, optimal policy right now would really be annual deficits of around $1.7 trillion per year for a few more years.  

    Still, if you are nervous about all that deficit financing (though you shouldn't be, really), the reasonable alternative is to pay for some of that upfront now by actually taxing some of that idle cash that's out there.

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