Paul Krugman, January 6, 2009:
This really does look like a plan that falls well short of what advocates of strong stimulus were hoping for — and it seems as if that was done in order to win Republican votes. Yet even if the plan gets the hoped-for 80 votes in the Senate, which seems doubtful, responsibility for the plan’s perceived failure, if it’s spun that way, will be placed on Democrats.
I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says “See, government spending doesn’t work.”
Keep in mind that when Krugman wrote that, Bush was still President and the Senate had yet to reduce the scope of Pres. Obama's stimulus plan -- and had yet to divert more of its stimulative spending into unproductive tax cuts.
Flash forward to today, and the only thing that Krugman was wrong about was that the unemployment rate peaked at over 10 percent. This is something that the Obama administration seems to be recognizing, at least tacitly; over the weekend, they pushed for another $50 billion in spending.
Of course, it's going to take a lot of heavy lifting to get that $50 billion, thanks in large part to the dynamic Krugman pointed out (McConnell saying "See, government spending doesn't work"). And the White House won't just have to battle Republicans or Blue Dogs, either: Steny Hoyer on Sunday said that he wanted the money to come from unspent stimulus funds, which is a truly absurd idea if the goal here is to provide additional stimulus.
The truly maddening thing about all this foolish focus on short-term fiscal restraint is that nobody who is now urging austerity protested Bush's budget-busting tax cuts at the start of the last decade. As Krugman wrote on February 1, 2009:
Dean Baker is having some fun with the Washington Post, which keeps looking for superlatives to describe the “staggering”, “breathtaking” expense of the stimulus plan. And Dean is quite right to point out that reasonable estimates of the shortfall in private demand are on the order of three times the $800 billion package. (Jan Hatzius at Goldman, using different methods, arrives at more or less the same number.)
One other comparison worth making, however, is with the Bush tax cuts, which will end up having cost about $2 trillion over the course of a decade — without anything like the economic rationale for the stimulus. Did the Post find this cost staggering? Inquiring minds want to know.
There's no doubt that the administration was dealt a bad deck in January 2009, but they haven't made it any easier on themselves. It's true that Obama's top economic advisers are now pushing for more stimulus and it's true that even Obama-appointed Ben Bernanke is channeling Paul Krugman, but President Obama himself has not done enough to push back on the absurd notion that the time to reduce spending is right now.
Instead of talking about things like domestic spending freezes and deficit reduction commissions that could slash Social Security, the President should spend more time making the case that the best way to get the budget in balance is to grow the economy -- thereby increasing revenue.
On January 9, 2009, President Obama said that if Paul Krugman had a good idea on getting the economy going, the administration would listen. Now would be a good time to start.