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Friday, September 03, 2010

Paul Krugman: The Real Story

When Obama announces his new measures to boost the economy next week, will he learn from the mistakes he made the first time?:

The Real Story, by Paul Krugman, Commentary, NY Times: Next week, President Obama is scheduled to propose new measures to boost the economy. I hope they’re bold and substantive, since the Republicans will oppose him regardless — if he came out for motherhood, the G.O.P. would declare motherhood un-American. So he should put them on the spot for standing in the way of real action.
But let’s put politics aside and talk about what we’ve actually learned about economic policy over the past 20 months.
When Mr. Obama first proposed $800 billion in fiscal stimulus, there were two groups of critics. Both argued that unemployment would stay high — but for very different reasons.
One group — the group that got almost all the attention — declared that the stimulus was much too large, and would lead to disaster..., skyrocketing interest rates and soaring inflation.
The other group, which included yours truly, warned that the plan was much too small given the economic forecasts then available...; an $800 billion program, partly consisting of tax cuts that would have happened anyway, just wasn’t up to the task...
Critics in the second camp were particularly worried about what would happen this year, since the stimulus would ... gradually fade out. Last year, many of us were already warning that the economy might stall in the second half of 2010.
So what actually happened? ... Start with interest rates. Those who said the stimulus was too big predicted sharply rising rates. When rates rose in early 2009, The Wall Street Journal ... declared that it was all about fear of deficits, and concluded, “When in doubt, bet on the markets.”
But those who said the stimulus was too small argued that temporary deficits weren’t a problem as long as the economy remained depressed; we were awash in savings with nowhere to go. Interest rates, we said, would fluctuate with optimism or pessimism about future growth, not with government borrowing.
When in doubt, bet on the markets. The 10-year bond rate was over 3.7 percent when The Journal published that editorial; it’s under 2.7 percent now.
What about inflation? Amid the inflation hysteria of early 2009, the inadequate-stimulus critics pointed out that inflation always falls during sustained periods of high unemployment... Sure enough, key measures of inflation have fallen ... to 1 percent or less..., and Japanese-style deflation is looking like a real possibility.
Meanwhile, the timing of recent economic growth strongly supports the notion that stimulus does, indeed, boost the economy: growth accelerated last year, as the stimulus reached its predicted peak impact, but has fallen off — just as some of us feared — as the stimulus has faded. ...
The actual lessons of 2009-2010, then, are that scare stories about stimulus are wrong, and that stimulus works when it is applied. But it wasn’t applied on a sufficient scale. And we need another round.
I know that getting that round is unlikely... And if, as expected, the G.O.P. wins big in November, this will be widely regarded as a vindication of the anti-stimulus position. Mr. Obama, we’ll be told, moved too far to the left, and his Keynesian economic doctrine was proved wrong.
But politics determines who has the power, not who has the truth. The economic theory behind the Obama stimulus has passed the test of recent events with flying colors; unfortunately, Mr. Obama, for whatever reason — yes, I’m aware that there were political constraints — initially offered a plan that was much too cautious given the scale of the economy’s problems.
So, as I said, here’s hoping that Mr. Obama goes big next week. If he does, he’ll have the facts on his side.

    Posted by on Friday, September 3, 2010 at 12:24 AM in Economics, Fiscal Policy, Politics | Permalink  Comments (77)


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