Too Little of a Good Thing
By PAUL KRUGMAN
Published: November 1, 2009
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.
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Times Topics: Economic Stimulus
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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. Without the recovery act, the free fall would probably have continued, as unemployed workers slashed their spending, cash-strapped state and local governments engaged in mass layoffs, and more.
The stimulus didn’t completely eliminate these effects, but it was enough to break the vicious circle of economic decline. Aid to the unemployed and help for state and local governments were probably the most important factors. If you want to see the recovery act in action, visit a classroom: your local school probably would have had to fire a lot of teachers if the stimulus hadn’t been enacted.
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. As Mark Zandi of Moody’s Economy.com put it in recent testimony, “The stimulus is doing what it was supposed to do: short-circuit the recession and spur recovery.”
But it’s not doing enough.
Suppose that the economy were to keep growing at 3.5 percent. If that happened, unemployment would eventually start falling — but very, very slowly. The experience of the Clinton era, when the economy grew at an average rate of 3.7 percent for eight years (did you know that?) suggests that at current growth rates 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 — it’s still likely to create or save a total of around three million jobs — but its peak impact on the growth of G.D.P. (as opposed to its level) 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 one of two arguments: 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 was too little of a good thing — that it 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 — both spending on plant and equipment and “intangible” investments in such things as product development and worker training. 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 right now. 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 — and those who enter the work force in years of high unemployment suffer permanent career damage, never catching up with those who graduated in better times.
Even the claim that we’ll have to pay for stimulus spending now with higher taxes later is mostly wrong. Spending more on recovery will lead to a stronger economy, both now and in the future — and a stronger economy means more government revenue. Stimulus spending probably doesn’t pay for itself, but its true cost, even in a narrow fiscal sense, 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 appe e 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.
Don't worry, the Dems don't have the balls to even mention more stimulus, never mind get it passed.
Looks like US is repeating Japan's L-shaped recovery when Japan was also too timid in reacting to the popping of their 1980s property bubble.
Hey, whatever the Repugs can do to help Magic Negro fail, no matter how hard it hurts US citizens.
Well then, it falls to those who believe the government should fill the demand gap to fight like to get it done, and convince others along the way. The word stimulus is a loser, so the policy will have to be repackaged.
Unemployment benefits have already been extended: how about payroll tax relief? People will spend that. Enough help for billionaires; how about a little something for you and me?
I am a billinoare, WH.
All joking aside, I don't think a 2nd stimulus is anywhere near politically possible. Not with growth figures - however anemic - coming out. I'm not sure if the Democrats got all they could have gotten but that store is definetly closed now.
"growth figures"
yep, job growth is wonderful, those payroll taxes are inflating their own IRS revenue bubble.
I think a good rule-of-thumb is to listen to whatever advice Krugman is dishing out and do the exact oppposite.
Still my favorite Krugman moment.
Especially since they haven't tapped all the funds from the first one.
Where is that money anyway? If a second one is needed, was it extorted?
Maybe not the opposite, but by no means what he advocates.
Extorted?
You're an idiot.
isn't this what krugman was saying since the last stimulus, that obama didn't go far enough...
Yeah. At the time he said it wouldn't be big enough. Stiglitz said the same thing.
I don't think anything he's said on the matter has been inconsistent or incorrect for that matter. He simply doesn't think 3.5% growth is nearly enough to get us to full employment figures quickly and the data he's provided to back up his claims supports them.
You should read the article. This is addressed.
I wonder if those same canadians would listen to him any closer about the economy.I doubt it.
Krugman is far too much of a little goofy man to be part of the Beard Brethren.
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