I will focus my comments on debt levels and on the wealth of the household sector.

Quarter 4 debt of the domestic nonfinancial sectors rose a seasonally-adjusted annual rate of about 5 percent. This breaks down to private sector debt up 1.25 percent and public sector debt up 12.75 percent. The private sector debt consists of household debt, which declined 0.5 percent, and business debt which rose 3.5 percent. The public sector debt increase was driven by 8 percent and 20 percent respective increases of state/local and federal debt.

Fourth quarter U.S. household sector wealth increased by $2.1 trillion, driven by gains in equities and funds that are influenced by equities, mutual funds and pension funds. The value of credit market instruments and deposits rose a lessor extent. The wealth data are not seasonally adjusted.

The wealth gain occurred despite a fall in housing assets of $185 billion to $18.19 trillion, the lowest level since 2003, and the second consecutive quarterly decline. This fall contributed to a fall in owner’s equity in household real estate of over $200 billion and a fall of home equity as a share of housing assets from 39.1 to 38.5 percent.

The main indicator of small business vitality in this report, the equity of noncorporate business, increased very slightly.

From this report, I see that the United States real estate sector is still very weak. I also see that the household sector is indeed reducing its debt levels, but I worry that the pace is too slow. I carry these worries with me into our model run for our March 24 United States and California Economic Forecast.

The idea has merit, and now might be a good time to implement it. Business investment has been extraordinarily weak for a long time now. Businesses may be feeling the lack of investment, but they are unwilling to invest now, because of uncertainty about the recovery. A tax credit might be just what is needed to push some of them into investing. It would also encourage hiring. Capital and labor are compliments. More capital would improve the productivity of labor, reducing the cost of hiring.

Certainly, it would be better to run a deficit to fund investment than continue the existing program of funding current consumption with deficits. This policy would imply a higher steady-state level of future capital stock than with the current policy, with greater future productive capacity. The higher future capital stock means the economy would have more resources available for consumption, further investment, or (heaven forbid) paying down debt.

The problem is that deficits are not all the same. In WWII and the Cold War, we did save the world, but it wasn’t because of the deficits. They merely facilitated what had to be done. The deficits bought us something. The same is true of the 1930’s spending. While there was much waste, counter-productive spending, and inefficiencies, the spending included things like the Rural Electrification Program and the Tennessee Valley Authority. These were investments. They made private capital more productive.

By contrast, the current stimulus has very little spending that will increase private capital’s productivity. At least some of the spending is worse than wasting money, as much of it actually rewards bad behavior.

Krugman can’t seem to differentiate between investments, wasting money, and counter-productive spending. It is all about the deficit. Digging holes and filling them back up is just as good for him as building public infrastructure. Of course, that’s not true.