Saturday, 4 July 2009

Krugman wants another stimulus package

The US economy has had two stimulus packages in a year. Now, Krugman wants a third.

From the New York Times...

O.K., Thursday’s jobs report settles it. We’re going to need a bigger stimulus. But does the president know that?

Since the recession began, the U.S. economy has lost 6 ½ million jobs — and as that grim employment report confirmed, it’s continuing to lose jobs at a rapid pace. Once you take into account the 100,000-plus new jobs that we need each month just to keep up with a growing population, we’re about 8 ½ million jobs in the hole.

And the deeper the hole gets, the harder it will be to dig ourselves out. The job figures weren’t the only bad news in Thursday’s report, which also showed wages stalling and possibly on the verge of outright decline. That’s a recipe for a descent into Japanese-style deflation, which is very difficult to reverse. Lost decade, anyone?

Wait — there’s more bad news: the fiscal crisis of the states. Unlike the federal government, states are required to run balanced budgets. And faced with a sharp drop in revenue, most states are preparing savage budget cuts, many of them at the expense of the most vulnerable. Aside from directly creating a great deal of misery, these cuts will depress the economy even further.

So what do we have to counter this scary prospect? We have the Obama stimulus plan, which aims to create 3 ½ million jobs by late next year. That’s much better than nothing, but it’s not remotely enough. And there doesn’t seem to be much else going on. Do you remember the administration’s plan to sharply reduce the rate of foreclosures, or its plan to get the banks lending again by taking toxic assets off their balance sheets? Neither do I.

All of this is depressingly familiar to anyone who has studied economic policy in the 1930s. Once again a Democratic president has pushed through job-creation policies that will mitigate the slump but aren’t aggressive enough to produce a full recovery. Once again much of the stimulus at the federal level is being undone by budget retrenchment at the state and local level.

So have we failed to learn from history, and are we, therefore, doomed to repeat it? Not necessarily — but it’s up to the president and his economic team to ensure that things are different this time. President Obama and his officials need to ramp up their efforts, starting with a plan to make the stimulus bigger.

Just to be clear, I’m well aware of how difficult it will be to get such a plan enacted.

There won’t be any cooperation from Republican leaders, who have settled on a strategy of total opposition, unconstrained by facts or logic. Indeed, these leaders responded to the latest job numbers by proclaiming the failure of the Obama economic plan. That’s ludicrous, of course. The administration warned from the beginning that it would be several quarters before the plan had any major positive effects. But that didn’t stop the chairman of the Republican Study Committee from issuing a statement demanding: “Where are the jobs?”

It’s also not clear whether the administration will get much help from Senate “centrists,” who partially eviscerated the original stimulus plan by demanding cuts in aid to state and local governments — aid that, as we’re now seeing, was desperately needed. I’d like to think that some of these centrists are feeling remorse, but if they are, I haven’t seen any evidence to that effect.

And as an economist, I’d add that many members of my profession are playing a distinctly unhelpful role.

It has been a rude shock to see so many economists with good reputations recycling old fallacies — like the claim that any rise in government spending automatically displaces an equal amount of private spending, even when there is mass unemployment — and lending their names to grossly exaggerated claims about the evils of short-run budget deficits. (Right now the risks associated with additional debt are much less than the risks associated with failing to give the economy adequate support.)

Also, as in the 1930s, the opponents of action are peddling scare stories about inflation even as deflation looms.

So getting another round of stimulus will be difficult. But it’s essential.

Obama administration economists understand the stakes. Indeed, just a few weeks ago, Christina Romer, the chairwoman of the Council of Economic Advisers, published an article on the “lessons of 1937” — the year that F.D.R. gave in to the deficit and inflation hawks, with disastrous consequences both for the economy and for his political agenda.

What I don’t know is whether the administration has faced up to the inadequacy of what it has done so far.

So here’s my message to the president: You need to get both your economic team and your political people working on additional stimulus, now. Because if you don’t, you’ll soon be facing your own personal 1937.


Jo said...

Krugman and his like are very comfortable spending other peoples money.

They need to (and will) be stopped.

Anonymous said...

What ails the US is the same that ails the UK.

Socialist, (in the UK a filthy fabian gov't and the US, now blatantly corporate fascist) governments are failing to curb their own spending.

We are both fighting endless foreign wars, heavily engaged in endless social engineering, a blatant dumbing down via falling education levels, gazillion miles of red-tape administered by gold plated pensioned morons, thousands of quangos, yada, yada, .

99% of UK QE is going towards purchasing gilts, which allows political fuckwits to continue their fabian spending nonsense, when the intention was to purchase a heavy element of corporate debt, so as to short circuit the lending freeze to corporate entities by the banks.
This would have forestalled the upcoming employment crash, and a potential double dip next year.

Cameroon will never tackle the regional assemblies, Common Purpose "Management Beyond Authority", specifically thought up by Mulgan of Demos, and crack-head Middleton, to deliberately destabilise UK democratic structures in favour of EU led structures which exactly mimic ex Soviet Structures. Nor will he tackle all the regional slush funds, ie Yorkshire Foreward, which are still throwing money about on Hair-brained schemes hidden behind PFI, and benefiting Common Purpose graduates owning/managing their own businesses, - blatant corruption everywhere you look!

Until that pile of crap is rooted out, financing of Industry re-established, banks made to separate their legitimate banking activities from their speculative activities, Basel 2 rewritten, leverage levels forced down, Gov't borrowing cut by 80%, decent education re-born, social engineering ceased, and the perps prosecuted, there will be no progress in this septic isle beyond the present banana, upcomming Zimbabwe type shi*e hole.

deepian said...

Stimulus? Ridiculous! You cannot grow your way out of a bubble - the pop when it comes will just be louder and more destructive. Bye Bye Economy.... Economists are the primary culprits - they should know better :(

Careless Talk Costs Lives said...

Anonymous said...

and the US, now blatantly corporate fascist...

Anyone read this?