One of the strange things about our current economic situation is that, over the long run we need to save MORE, but over the short-term we are saving TOO MUCH. Over the past ten years or so we have been saving almost nothing and consuming with borrowed money. And the borrowing was against an illusory asset—housing prices in a bubble. Not good.
But now, fear has caused people to spend too little. People are even afraid to save money in traditional ways; its all going to the safety of US Treasury securities. So we need the federal government to step in and fill the gaps. First we need massive spending to stabilize the economy; then we need a prudent level of savings to provide for investment over the long term.
Over at TNR Jacob Hacker makes the case for healthcare reform as the perfect stimulus:
During the campaign, skeptics complained that a health care overhaul would involve a lot of upfront costs and that the saving would only come later. But that’s exactly what we need right now. Health care involves major spending in the near future, but, more than other initiatives, it will put a brake on federal outlays in the far future.
Exactly. Hacker has some of the detail of how this will work in the short-term, but in the long-term it could be a huge savings, plugging a large portion of the $53 trillion hole in the federal budget that our accountant in chief, David Walker, likes to talk about.