Krugman In Wonderland
Perhaps it’s the thin air in the lofty atmosphere of the Nobel Prize, but Paul Krugman has a most peculiar trait for an economist: he seems to live in a world where the basic economic unit (money) has no intrinsic value to it. How else do you explain his constant cheerleading for more and more and more spending, on health care, on cap and trade, and on a second stimulus?
O.K., Thursday’s jobs report settles it. We’re going to need a bigger stimulus. But does the president know that?
Let’s do the math.
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.
Well, as Krugman notes, we have the Obama stimulus plan, which “aims to create 3 ½ million jobs by late next year”. Hmmm…how’s that going? Wasn’t it Krugman and his ilk who constantly assured us that you could spend money on anything, anything at all, and that would create all those new jobs out of thin air? Is is possible that maybe, just maybe, it matters WHAT you spend the money on, and that the unproductive, pork-filled original stimulus has been a complete flop?
Even Joe Biden admits the administration missed the boat on jobs, while of course not missing a chance to decry the recession they “inherited”:
Big admission from Vice President Joe Biden today.
“The truth is, we and everyone else misread the economy,” Biden told me during our exclusive “This Week” interview in Iraq.
Biden acknowledged administration officials were too optimistic earlier this year when they predicted the unemployment rate would peak at 8 percent as part of their effort to sell the stimulus package. The national unemployment rate has ballooned to 9.5 percent in June — the worst in 26 years.
“The truth is, there was a misreading of just how bad an economy we inherited,” said Biden, who is leading the administration’s effort to implement it’s $787 billion economic stimulus plan.
“Now, that doesn’t — I’m not — it’s now our responsibility. So the second question becomes, did the economic package we put in place, including the Recovery Act, is it the right package given the circumstances we’re in? And we believe it is the right package given the circumstances we’re in,” he told me.
The vice president argued more time is needed for the stimulus to work.
“We misread how bad the economy was, but we are now only about 120 days into the recovery package,” he said. “The truth of the matter was, no one anticipated, no one expected that that recovery package would in fact be in a position at this point of having to distribute the bulk of money.”
Biden didn’t rule out a second government stimulus package, but downplayed calls from Nobel Prize-winning economist Paul Krugman this week that a second stimulus will be needed.
I pressed the vice president, who is also leading the administration’s middle-class task force, on whether he’d rule out a second stimulus package.
“So, no second stimulus?” I asked.
“No, I didn’t say that,” Biden said, “I think it’s premature to make that judgment. This was set up to spend out over 18 months. There are going to be major programs that are going to take effect in September, $7.5 billion for broadband, new money for high-speed rail, the implementation of the grid — the new electric grid. And so this is just starting, the pace of the ball is now going to increase.”
Why did the first stimulus fail (and it did fail – as Biden admits, the sell job to Congress was that unemployment would peak at 8% if the bill passed, and reach 10% if it didn’t)? Because it became a political bill. What has happened to the money that HAS been disbursed? It’s gone mostly to the states to paper over their budget deficits. If it has had a salutory effect, it’s that many cuts have been avoided this way – but these were job losses avoided, not new jobs created.
It didn’t have to be this way – we could have had a very targeted stimulus package aimed solely at a need that everyone recognizes – our decaying infrastructure of roads, bridges, and highways. Or we could have had a stimulus bill like the first that gave money directly to taxpayers and citizens. Either would have boosted spending and created NEW jobs, either directly or through the effect of increased consumer spending (yes, there were elements of both in the bill passed, but not enough).
It’s too late for that now, however, and the circumstances have changed. We simply have to quit living in this fantasy world where we think it is possible to propose massive new spending in the face of a deficit that staggers belief. We cannot afford a second stimulus, and if it takes the form of the first one, it would be another political mess that would take months and months to distribute, to little effect other than a greatly enlarged deficit, and by the time its effects could be felt, the economic cycle will have begun to turn on its own, anyway, in all likelihood.
I don’t blame Obama and his supporters for their panic at the sight of the continued decline in jobs – after all, the days when they could blame it all on Bush have passed…but Obama would do well to avoid introducing a second stimulus. I don’t think that’s a battle that he could win, and he has an enormously expensive health care reform package that he is still trying to sell…I think Biden’s response today, though delivered with a typical politician’s desire to leave the door open for a change of heart, is indicative of the fact that a second stimulus is not an administration priority at the moment – and that’s the way it should stay.
We’re going to have to ride this recession out, and it’s unfortunately got a ways to go yet. The best government policy at this point would be to get our fiscal house in order, bringing down long-term interest rates, and making borrowing less costly for corporations (and bringing mortgage rates back down again, to boot)…instead of a second stimulus, we need a deficit reduction act…
Peter and Jacques have assured us that the economy has turned the corner.
So, Krugman must be wrong.
As for Biden, I thought the “stimulus sheriff’ was in charge of Iraq now?
I never made any such assurance.
In fact, I repeatedly said that I did not expect a recovery till 2010, at the earliest.
Please stop fantasizing about what I say here. I’m sure you can find enough to disagree with, in the stuff that I actually do say.
The assertion, not just by Krugman, but by (Nobel Laureate) Joe Stiglitz and a host of other economists, is not that the Stimulus failed. It can’t have failed (yet), because — as you, yourself, have noted — it largely hasn’t kicked in yet.
The assertion is that the boost to aggregate demand that the Stimulus will provide (when it kicks in) will be too small to compensate for the drop in demand from the private sector. This recession is deeper than the Administration was predicting in January. Krugman and others were more pessimistic, back then, and have been saying all along that the Stimulus bill that passed was too small for the task at hand.
If they’re right, recovery won’t come in 2010, as had been hoped.
It really does make a difference whether this recession lasts another two years, another five years, or another ten.
The stimulus has already failed in its primary goal – the halt of joblessness. As Biden said, the plan was sold as a way to head off unemployment at 8%.
The ONLY reason I supported a stimulus plan of any sort was because of jobs – it’s the same reason I supported aid to the auto companies.
Obama did not say that unemployment would rise to 10% and then gradually come back down when the spending kicked in. He said that unemployment would rise to 10% without the plan – and it did anyway, even after the plan was passed.
That’s a failure…
Ugh! You expect me to defend the pronouncements of Joe Biden?
8% was the peak unemployment that the Administration was forecasting back in January. The size of the proposed stimulus package was tailored to a recession of that depth.
Their forecasts were wrong. The recession is deeper than that.
Either way, no reputable economist, inside or outside the Administration, expected the stimulus (of whatever size) to kick in before late 2009, nor for any serious recovery to take place before 2010.
If you thought that the stimulus money would have made its way into the Economy by March, and that a recovery would be underway by July, then it’s no wonder you are disappointed.
The only thing I don’t understand is where you might have gotten that impression.
One explanation is that the forecasts were wrong – another is that the stimulus did not have the desired effect.
True, it takes time to put big programs into place. That’s my point in the post itself – that we had the wrong kind of stimulus package. Giving rebates to taxpayers has a much more immediate effect…but of course, you can’t steer billions to pet projects with that kind of stimulus, so we passed a dog and were told it didn’t matter, that ANY spending was inherently good.
My point is not that the stimulus, as passed, has had enough time to work or to fail…it’s that it was too slow-moving to stop the jobs train wreck…
It’s not an ‘explanation’. It’s a statement of fact. The forecasts were wrong (and people like Krugman predicted they would be wrong).
Part of the stimulus package (an overly large part, according to some) was devoted to tax cuts and rebates.
The evidence is that most of those were saved, rather than spent.
How can you say that, knowing full well that most of the money hasn’t even gone out the door, yet?
That’s the nature of fiscal stimulus. That’s why monetary policy is the preferred method for fighting recessions, in normal times.
These are not normal times.
Sorry. I missed the “not” in that sentence.
My bad.
Mark,
Jacques is correct.
Very few economists and analysts on either the left or the right agreed with the Obama administration’s assessment of the economy and depth of the recession.
Very few economists and analysts on either the left or the right thought that the stimulus package would have much, if any, effect by now.
However, in both cases, the Obama administration either thought what no one else thought, or led us to believe that they did. This does not bode well for their handling of the economy over the next three years. Still, perhaps they’ll learn from their mistakes and get better. Still, it’s obvious at this point that anything the Obama administration says about economic growth must be viewed with a high degree of skepticism. Since it’s precisely these estimates of growth that are behind their cost estimates of cap and trade and health care reform (more so the former than the latter), these programs need to be considered in a much more pessimistic manner. But, I digress.
I disagree slightly with Jacques on one point. I don’t think there’s any such thing as a “normal” recession. I think they all present their own unique challenges. I even agree with Jacques that the challenges present in this recession require some sort of mixture of government intervention and reduction in taxes.
However, I am, as always, leery of too much government, in that I don’t want the government to do things that the free market should do, i.e. “pick winners”. There is some of that in the stimulus. There’s also an awful lot of “pet projects” in the stimulus, an unfortunate side effect of the way our government works. I don’t think you could pass a spending bill of that size in America without having billions of dollars of pet projects and pork in it. This is something that must be fixed, and I admit I don’t know how. But, again, I digress.
Jacques says that according to some, that too much of the stimulus was based on tax cuts. That’s the first I’ve heard of that, but I don’t doubt it’s veracity. According to some, any tax cut is a bad thing. IMO, there wasn’t nearly enough tax cutting in the stimulus. That appears to be the only way of getting immediate relief. However, the tax cuts must be permanent or long lasting enough to avoid the dreaded “double dip” recession, which is a misnomer to say the least. A double dip recession occurs when new money is temporarily poured into the economy (through tax cuts or whatever) to jump start the economy without doing anything about the underlying reasons behind the recession in the first place. When the new money runs out, the recession starts all over. This is the liberal argument against tax cuts for economic stimulus, and it’s not completely wrong. It just shows that tax cuts, by themselves, are almost never a solution. What they are is a good first step.
In short, this is a bad stimulus package, and it was based upon bad interpretation of the economy. Krugman may be correct that a second stimulus is needed. One that can actually stimulate. In fact, I may have been the very first to ask for a second stimulus package, as I asked for one on the day the stimulus package was passed. (Damn, I wish I had blogged it rather than putting it in a comment that I can no longer find on one of the many blogs I subscribe to).