is almost absurdly simple: We had an immense housing bubble, and, when the bubble burst, it left a huge hole in spending. Everything else is footnotes.
And that the solution
was simple, too: Fill that hole in demand. In particular, the aftermath of the bursting bubble was (and still is) a very good time to invest in infrastructure. In prosperous times, public spending on roads, bridges and so on competes with the private sector for resources. Since 2008, however, our economy has been awash in unemployed workers (especially construction workers) and capital with no place to go (which is why government borrowing costs are at historic lows). Putting those idle resources to work building useful stuff should have been a no-brainer.
My wife and I spent the past two days drifting down Montana's beautiful Madison River. While that may sound like a relaxing experience, really, it's not. It's amazing, don't get me wrong, but when you're fly casting from morning till late afternoon, on your feet, balancing through often choppy waters, you're spent, really spent, by the end of the day. Today, our fishing gear (our capital) is idle. In fact, save for me jumping out of the car a time or three over the next couple of days to fish a small stretch of some Yellowstone stream, it'll remain so for a while.
My point: all things are cyclical, and periodic idleness is unavoidable. Unavoidable and, in fact, essential: Idle times are when we regroup, reassess, think about/plan where we might go next (which---that assessing/planning---is an all-important use of human capital). And sometimes, even during the fishing season, rough weather can dampen our spirits and idle our physical capital longer than usual.
Were we, in our dampness, to lose patience and go fishing when nature says no, really bad things might happen. So we don't, and our capital sits idle. And if some anxious and inexperienced angler asks to rent our idled gear, well, no. We'd fear he'd miscalculate the risks and ultimately damage, if not ruin, our capital---costing us far more than the rent we received.
So, the "footnotes": The fishing---in the housing market---seemed really good for a really long time. We learned, after the fact, that something in the water---some concoction brewed up by Wall Street, Washington, and the Fed---over-stimulated production to the point where the market bore little resemblance to reality. Capital was essentially pushed way beyond its naturally-productive capacity and, naturally, the resulting damage had kept folks out of the water and capital idle for an unusually long time.
But the thing about such things is that, in the real world, they're lessons. Some capital sits idle while we process through what just occurred and wait for the weather to clear a bit before we begin putting it back to work.
The likes of Krugman, on the other hand, will have none of that. Weather, instincts, experience---not to mention budget deficits---be damned! If the private sector isn't ready to get that capital back to work, let's have the politician (that anxious, inexperienced angler) grab it and do something, anything (hey! holes in our roads need filling) with it.
And pray we can get it back intact and put it to productive use when we're ready. Although he may wrestle us for---or attempt to influence our use of---it, as he may be looking to dodge his way around whatever next mess/miss (as in misallocation of capital) he gets us into...
Footnote: The going forward prospects for capital investment have improved markedly of late, and it's beginning to show up in the numbers. Meaning, the private sector looks to be getting back to work and investing where it sees legitimate opportunities. I understand there's some truth in Krugman's concerns with regard to infrastructure, and if the economy is indeed, at last, gaining some traction, I suspect the appetite for infrastructure spending will improve as well. Although addressing those needs would be better left to the private sector, but we'll save that story for some other time.