Nobody knows anything.
I’m far more inclined to trust Paul Krugman, who really knows his economics, than Niall Ferguson, who really doesn’t. Moreover, it certainly helps that 1) all the conservatives now quailing about the deficit have been silent for the last 8 years; and 2) Martin Wolf, who is no left-winger, also thinks that the inflation talk is overblown. But Barry Ritholtz, whom I do regard as a straight-shooter, sees some merit in the inflation worries.
So what to do? Here’s a proposal. Focus federal spending on items that figure to expand long-term potential output. In other words, don’t try to get people to consume their way out of the recession, but use spending that also serves as a form of investment or otherwise reduces inefficiencies in the economy.
This is one reason why, I believe, Obama is focusing so much on health care. Health care is one-sixth of the economy; the US system is enormously inefficient; and long-term American strong economic growth is far, far less likely unless we can get that system fixed. Fixing it also means some upfront expenditures now. But that is a feature, not a bug, because it does provide more spending.
Infrastructure is another form of this sort of spending. Building a strong rail network isn’t just really cool; it makes the economy more efficient in the long run. (It also helps reduce the country’s carbon footprint, which reduces the potentially enormous health and environmental costs of climate change). Education, too, is very helpful in this way.
From a progressive perspective, this policy has downsides, because things like Food Stamps and unemployment insurance, which people really need and which have countercyclical punch, are not included. But the countercyclical point isn’t really a point if we are worried about inflation. And in any event, other kinds of spending — such as big defense programs that Robert Gates doesn’t want — are completely wasteful. They contribute nothing to long-term economic growth.
This is one other way of trying to finally start dividing expenditures into consumption and capital budgets. If you’re worried about stagflation, which has long-term conservative political implications, but not ready to drink the Friedman-Bush-Cheney-Ferguson kool-aid, then focusing on capital expenditure is the way to go.
UPDATE: I was wondering why I thought this was such a good idea. Now I know: Bob Frank wrote about a similar concept a couple of months ago.