UPDATE: Tyler Cowen links to this interesting Krugman post and points out this question:
And if states and localities can borrow freely, how do you explain the drastic fall in their spending I have been documenting?
To answer his question directly, I’d argue that people want to spend less and they have far more influence at the state and local level than at the federal level. I would take (I think) a one trillion dollar swap of federal spending reductions for local spending increases, conditional on those local spending increases NOT going to the public school system. Would Mr. Krugman at least agree to the unconditional swap? Of course not. And the reason I linked to the post is that his question is infuriating. It assumes that increased state spending is ipso facto desirable and good. As I’ve pointed out elsewhere, I’ll take him and anyone like him more seriously when they propose a world where there is ever a time to reduce the role (scope and size) of government. And if he is truly the committed Keynesian he claims to be, then surely we can expect to see him write a column during Obama’s second term when the economy is humming that Keynesian orthodoxy requires a slowdown in government spending to cool down the economy. I won’t hold my breath.
The point again is that it is incredibly frustrating trying to argue policy ideas when really what is happening is that some folks want to have an orgy of state activity and others an orgy of austerity. I am not a utilitarian. I find the state to be morally bankrupt. And so I don’t even care if having a big government would make “us” richer. I really don’t. But I don’t hide that view.