Leveraging, Deleveraging, and Fiscal Policy, by Paul Krugman, in NY Times:
Just a brief note.
It’s an awkward fact — for the fiscal responsibility types, anyway — that Spain and Ireland were running budget surpluses, not deficits, before the crisis. It was private borrowing, not public borrowing, that created the mess.
But, say some commenters, this was nonetheless malfeasance on the part of the authorities; they should have been running even bigger surpluses to offset the private credit bubble.
One answer is that at the time there was no consensus that it was, in fact, a bubble — conventional sources like the IMF and the OECD did not assert that there were big problems.
But here’s my thought: do all the people who believe that it’s appropriate for governments to run big surpluses to offset rising private-sector leverage also believe that it’s appropriate to run big deficits to offset large-scale private deleveraging — which is what’s happening now? If not, why not? Why the asymmetry?
Inquiring minds want to know.