When interest rates are low and output gaps are large, temporarily large deficits are necessary to absorb excess savings and put excess resources back to work. To miss this fundamental insight is to forget critical and painful lessons learned generations ago.
Interest rates are low
and the output gap is large
The output gap is the difference between the red line and the black line (Or, less optimistically, the difference between the blue line and the black line.) Bottom line: The economy is running more than 7% below ‘normal’.
Translating Jared’s quote above: “Temporarily large deficits” = government spending on goods and infrastructure. To wit, the House Progressive Caucus’s budget indicates both an understanding of how fiscal policy can give the economy a boost and a commitment using it. President Obama’s budget, the House GOP budget, other budget proposals… no. (NB: Understanding is useless without a commitment to putting it into practice.)