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Stimulus 2?

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Paul Krugman has a piece up at the New York Times from yesterday comparing America’s financial woes today to the period of the sharp downturn of 1938. He argues:

The economic moral is clear: when the economy is deeply depressed, the usual rules don’t apply. Austerity is self-defeating: when everyone tries to pay down debt at the same time, the result is depression and deflation, and debt problems grow even worse. And conversely, it is possible — indeed, necessary — for the nation as a whole to spend its way out of debt: a temporary surge of deficit spending, on a sufficient scale, can cure problems brought on by past excesses.

Krugman is a big supporter of government spending to help push the U.S. out of the ongoing economic doldrums. Not being a big student of economics (for which Krugman has won the Nobel Prize) I have to take his word for a lot of what he says — but I have yet to find him wrong about things financial, and he certainly backs up his arguments with good historical examples.

The economist has stressed that this kind of deficit spending is only advisable when two major forces come into play:

…high unemployment, so that the proximate risk is deflation, not inflation; and monetary policy constrained by the zero lower bound.

When interest rates are as low as you can go, and there aren’t any other carrots to hold out to entice the markets into activity, government spending can help.

It’s hard to argue that the stimulus hasn’t had positive effects. The Center on Budget and Policy Priorities did an analysis in September of 2009 that found that provisions of the stimulus package:

…are preventing more than 6 million Americans from falling below the poverty line and are reducing the severity of poverty for 33 million more. Those 6 million people include more than 2 million children and over 500,000 seniors. This analysis includes state-specific estimates for California, Texas, Florida, New York, and Illinois.

In columns predating the  Obama stimulus package, Krugman advocated a much bigger program aimed at infrastructure improvement and the middle class. The proposed spending was too small, he insisted, to provide the punch needed to reinvigorate the economy.

The numbers seem to bear him out. Although economists seem to be divided on the issue of stimulus spending, all the indications are that the first stimulus wasn’t enough and the economist arguing against the package were pushing more tax cuts — which had not worked to stimulate the economy or job growth for nearly a decade.

Despite the common wisdom that deficit spending  slows a recovery, government spending actually produced an economic boom that “laid the foundation for long-run prosperity” in World War II.

The Krugman OpEd outlines the political difficulty of selling government spending in times of austerity — and why we should do it anyway. The basic point:

I had hoped that we would do better this time. But it turns out that politicians and economists alike have spent decades unlearning the lessons of the 1930s, and are determined to repeat all the old mistakes. And it’s slightly sickening to realize that the big winners in the midterm elections are likely to be the very people who first got us into this mess, then did everything in their power to block action to get us out.

It’s probably time for another, well targeted stimulus package.

Unfortunately, it doesn’t look like there is the political will to do it.

I predict if the Republicans take the house in the mid-term elections, we will see more of the magically prescribed tax cuts the dearly love — and more economic misery.

-Chris

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September 7, 2010 - Posted by | Uncategorized

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