Paul Krugman: Too Little of a Good Thing

We need to do more to stimulate employment and the economy, but the political climate is unfavorable:

Too Little of a Good Thing, by Paul Krugman, Commentary, NY Times: The good news is that the American Recovery and Reinvestment Act, a k a the Obama stimulus plan, is working just about the way textbook macroeconomics said it would. But that’s also the bad news — because the same textbook analysis says that the stimulus was far too small given the scale of our economic problems. Unless something changes drastically, we’re looking at many years of high unemployment.

And the really bad news is that “centrists” in Congress aren’t able or willing to draw the obvious conclusion, which is that we need a lot more federal spending on job creation.

About that good news: not that long ago the U.S. economy was in free fall. ... The stimulus ... was enough to break the vicious circle of economic decline. ... And the free fall has ended. Last week’s G.D.P. report showed the economy growing again, at a better-than-expected annual rate of 3.5 percent. ... But it’s not ... enough.

Suppose that the economy were to keep growing at 3.5 percent. The experience of the Clinton era, when the economy grew at an average rate of 3.7 percent for eight years ... suggests ... we’d be lucky to see the unemployment rate fall by half a percentage point per year, meaning that it would take a decade to return to something like full employment.

Worse yet, it’s far from clear that growth will continue at this rate. The effects of the stimulus will build over time..., but its peak impact ... is already behind us. Solid growth will continue only if private spending takes up the baton as the effect of the stimulus fades. And so far there’s no sign that this is happening.

So the government needs to do much more. Unfortunately, the political prospects for further action aren’t good.

What I keep hearing from Washington is ... either (1) the stimulus has failed, unemployment is still rising, so we shouldn’t do any more, or (2) the stimulus has succeeded, G.D.P. is growing, so we don’t need to do any more. The truth, which is that the stimulus ... helped, but it wasn’t big enough — seems to be too complicated for an era of sound-bite politics.

But can we afford to do more? We can’t afford not to.

High unemployment doesn’t just punish the economy today; it punishes the future, too. In the face of a depressed economy, businesses have slashed investment spending... This will hurt the economy’s potential for years to come.

Deficit hawks like to complain that today’s young people will end up having to pay higher taxes to service the debt we’re running up... But anyone who really cared about the prospects of young Americans would be pushing for much more job creation, since the burden of high unemployment falls disproportionately on young workers...

Even the claim that we’ll have to pay for stimulus ... with higher taxes later is mostly wrong. Spending more on recovery will lead to a stronger economy,... and a stronger economy means more government revenue. Stimulus spending probably doesn’t pay for itself, but its true cost ... is only a fraction of the headline number.

O.K., I know I’m being impractical: major economic programs can’t pass Congress without the support of relatively conservative Democrats, and these Democrats have been telling reporters that they have lost their appetite for stimulus.

But I hope their stomachs start rumbling soon. We now know that stimulus works, but we aren’t doing nearly enough of it. For the sake of today’s unemployed, and for the sake of the nation’s future, we need to do much more.