Spilling Red

More stimulus or balance the budget - which move is the right one for the U.S.?

The Keynesian approach seems to be accepted as the correct one today, but Harvard economist Niall Ferguson says more stimulus spending isn't a great answer.
It's not like we haven't tried Keynesianism in the past. Indeed, it was orthodoxy for most of the '60s and '70s that what you did in the face of unemployment was you ran deficits and you printed money. And guess what we ended up with, the 1970s stagflation, double-digit inflation and low growth.
Paul Krugman says not to do more deficit spending is nuts since the cost of borrowing is so cheap.
I'll give you a number. Suppose we talk about a trillion dollars, more or less, of spending in the next year or two. A trillion dollars, the U.S. government can currently borrow, if it issues inflation indexed bonds, it can currently borrow at an interest rate of about 1.7 percent. So a trillion dollars of spending is going to add to future interest costs only $17 billion a year, with a $2.5 trillion federal revenue base. It's not going to make a significant difference. But it could make all the difference in the world to the state of the economy in the near term... Yes, let's - let's have serious fiscal adjustment but not until the economy has recovered.
Niall Ferguson counters that the cost of borrowing is only so cheap until we overplay the hand, and then the bond markets can lose faith in the U.S. and pull the rug out from out of us.
I've been saying for a while that U.S. treasuries are a safe haven the way Pearl Harbor was a safe haven in early 1941. It's safe until it's not safe. It's safe until the bond market says wait a second, this isn't sustainable, we'd like a risk premium. Once you suddenly find your interest payments rising, it's very quickly a - a shift into a death spiral, a kind of tailspin in which things compound. The Greeks have been there. Spain is there now. Japan could be next. The U.K.'s teetering on the brink. And at some point I think in the next couple of years, the reality will be that the Paul Krugman recipe ends up having costs that exceed the benefits.
What resonates most for me from Ferguson is this - that the economy needs to be jolted into confidence by positive action, a restructuring of things that provides a sense of optimism while also providing real economic benefits.
What's frustrating to me is the - the way the discussion is conducted it seems like there is only a Keynesian option and the alternative is just sort of passively waiting for disaster. I think there is a better strategy that we could adopt. Imagine radical fiscal reform that attacked not only the - the entitlements problem, that fundamental problem of Medicare, Social Security that is going to bankrupt the country if something isn't done, and rationalize the tax code. Simplified income tax, maybe even create just a simple flat tax rate. Simplified and reduced corporate tax, created a federal sales tax. There is a way of creating a confidence-boosting fiscal reform. It's pretty radical. It has almost no congressional support. But it is an option that we should be discussing much more seriously.
The Krugman argument sounds compelling in a vacuum - less so when the alternative is presented.