But Krugman and others suggest that since the New Deal ran moderate deficits and the Depression persisted, then Roosevelt should have run bigger multiyear deficits -- and so should Obama. "[I]t's basically money we owe to ourselves. ... The best course of action, both for today's workers and for their children, is to do whatever it takes to get this economy on the road to recovery," Krugman wrote.
This is the wrong lesson to learn from the 1930s. The New Deal didn't fail because its deficits were too small. As Amity Shlaes shows in "The Forgotten Man," the New Deal failed because it interfered with the market's natural regenerative processes. By raising taxes, hamstringing producers with arbitrary regulations and creating uncertainly about what the government would do next, business people were unwilling to invest and hire workers.
Uncertainty about taxes, regulation and government policy similarly threaten recovery today.
Obama must realize that government has no wealth of its own and that commandeering scarce resources from the private sector only stifles the economy. Deficit spending does this two ways. When the Treasury borrows money, it outbids private borrowers who would have put the money to productive use. When the Fed creates money, it depreciates the dollar, shifts purchasing power from the people to special interests, and -- by tampering with the price signals -- creates an unsustainable recovery that will collapse and throw people out of work when the inflation stops.
The 2009 deficit is projected to be $438 billion. Obama's "stimulus" could take it up to a trillion and beyond. That's just the beginning since the Democratic Congress's spending wish list and Medicare's $35 trillion unfunded liability loom.
We should all worry about the deficit.