Door Number One

Brad DeLong describes three reasons why deficits are currently affordable:

Whenever I build a model in which expansionary fiscal policy fails to reduce unemployment, it is for one of three reasons:

1. Expectations of the present and future deficits cause the price level to jump now, so that increased nominal spending does not translate into increased real demand (i.e., Mitterand ca. 1981)
2. The expansionary effect of higher deficits is offset by higher interest rates that crowd out private investment and exports, offsetting the stimulative effect of the fiscal policy (i.e., Kohl ca. 1982)
3. Households expecting higher future tax liabilities cut back on their spending and boost their savings now, thus offsetting the stimulative effect of the fiscal policy (i.e., I can't think of a historical episode).

I pick option one, we did have a price rise in energy, it reached $75 /barrel.  When was it that price before?  In Jun 2007, just before the very rapid run up.  This time around economy did the normal thing, it contracted a bit to conserve oil.  It is our third or fourth run at this problem since 2006.