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Will America come to envy Japan's lost decade?

Perhaps the most depressing exchange of this morning's conference -- and believe me, there were plenty to choose from -- was between Goldman Sachs's Jan Hatzius and Paul Krugman. Hatzius started things off by questioning whether the Federal Reserve would really step up to the plate:

If we talk about what else could be done, I think the Federal Reserve could certainly do more. The question is whether what they'll do will have a substantial effect. It'll have some effect. But the numbers for the total amount of asset purchases really required to move the needle a lot is very large. There's a natural bias towards caution among monetary policymakers in this kind of environment.

So usually what happens is that you're in a liquidity trap and you're at the zero bound and you send the staffers away to try and figure out the optimal policy. They go away and model things and come back with some monstrously large number of the amount that needs to be purchased, and the policymakers say, 'Well, I'm not sure you've properly taken into account all the tail risks of this? How do you account for the tail risk that people will lose confidence?' So then the policymakers take a step back towards caution, and that's why in this kind of situation, stimulus tends to be underprovided compared to what's necessary. I think we'll do quite a lot, but it will still fall short of what we need.

Then Paul Krugman jumped in:

There's a trap, and it's the same thing that happened with fiscal stimulus. You do something in the right direction that's inadequate, and then people say, well, that didn't work, and instead of increasing the dosage and proving it right, you give the thing up altogether.

All of this is very familiar if you studied Japan in the '90s. In fact, we're doing worse than the Japanese did. Our monetary policy is a bit more aggressive, but our fiscal policy has been less aggressive. We have a larger output gap than they did, and we've had a surge in unemployment that they never had, and our political will to act has been exhausted much faster than theirs was. On the current track, we're going to look at Japan's lost decade as a success story compared to us. What we should be doing is a really big dose of stimulus on all of these fronts. Throw the kitchen sink at it. But if you ask me for ways to solve this problem that lives within the constraints of policymakers who don't want to be bold, I don't know that I have an answer for that.

So the political system is biased toward caution, which isn't a particularly good bias to have amid a financial crisis that requires massive, unconventional economic policy interventions. But because the policies were too cautious, they don't solve the problem, and that discredits them, which leaves the government without tools and the economy in tatters. It's a bit like taking too few antibiotics, noticing that you're still sick, and swearing off antibiotics altogether.

Oh, and this isn't even the most pessimistic thing I've heard -- well, read -- today.

By Ezra Klein  | October 5, 2010; 2:00 PM ET
Categories:  Economic Policy  
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Comments

Re' the fed, it wasn't biased toward caution when Greenspan began his election year attack on middle class wealth or when he spoke in favor of bush's tax cuts of their election year support of bush's TARP.

Posted by: lauren2010 | October 5, 2010 2:53 PM | Report abuse

One could argue that TARP was 'overprovided' compared to what was necessary. Perhaps the difference was something intangible, like leadership or plain luck?

Posted by: tuber | October 5, 2010 3:33 PM | Report abuse

Have you made the connection yet, Ezra, between the defective documentation and securitization problems now pervading mortgage foreclosures and the Fed's ability to engage in QE? Besides treasuries, much of the paper the Fed has been buying are mortgage backed securities. Nobody in their right mind would touch a MBS right now. Say what you will about Bernanke, he's not out of his mind, I don't think.

Posted by: bgmma50 | October 5, 2010 3:49 PM | Report abuse

The Fed can't create demand. It only creates money. The normal conduits for that money to enter the economy and create demand, banks, aren't lending. The government is paralyzed in terms of fiscal policy. Fannie and Freddie aren't viable conduits for creating demand because housing has a huge oversupply and interest rates are already about as low as they can get.

Wouldn't a National Infrastructure Bank be helpful right now? As a conduit for money from the Fed being used to create demand? My only concern is that these institutions would all be separate from government. How do we hold the people who decide what roads to build accountable if you can't vote them out of office? When both fiscal policy and monetary policy are run by 'independent institutions' have we hollowed out our government? What does it say about democracy when such vital functions have to be punted outside the system? Does government end up being just an insurance company (Social Security, Medicare, etc.) with guns?

Posted by: wayward_va | October 5, 2010 3:57 PM | Report abuse

I don't think the political system is biased toward caution. I think the political system is currently designed to be ineffective.

The Republicans are in a win-win situation by opposing additional stimulus: if it works, they cry that deficits are selling out future generations; if it fails, they point and say they were right all along about it not performing. The majority of Democrats who lean away from current conservative thinking was always a bare majority and certainly never large enough to enact the massive, unconventional policy solutions you mention. There's just nothing there outside of pure altruism to influence the Republicans, and conservatives in general, to help promote a broader solution.

Posted by: Jaycal | October 5, 2010 4:25 PM | Report abuse

Paul Krugman forecasts doom if we don't do EXACTLY as he says! Oh, no! And he's usually so relaxed! Oh, somebody help us, please!

Posted by: ostap666 | October 5, 2010 4:48 PM | Report abuse

"The Republicans are in a win-win situation by opposing additional stimulus: if it works, they cry that deficits are selling out future generations; if it fails, they point and say they were right all along about it not performing. The majority of Democrats who lean away from current conservative thinking was always a bare majority and certainly never large enough to enact the massive, unconventional policy solutions you mention. There's just nothing there outside of pure altruism to influence the Republicans, and conservatives in general, to help promote a broader solution."

Maybe that's because people like Krugman were hysterical 5 years ago about deficits.

Whoops.

Posted by: krazen1211 | October 5, 2010 4:53 PM | Report abuse

krazen1211 -

This is entirely consistent and it's one reason Bush economic policy was such a disaster. It doesn't take a genius to see that when the economy is strong and unemployment is low that you should be paying down debts and running small-to-nonexistent deficits. This in preparation for when the inevitable happens and the economy is not performing well and you need to provide additional help through government spending. It isn't rocket science. But Bush wasn't ignorant. He knew that by running huge deficits while he was in office that the day would come when the economy would tank, but we'd be too hard-up to do anything substantial about it and so, logically, all of the Republicans would chant in unison "It's the deficits!! It's always been the deficits!!". Quick quiz for you - what spending did the Republicans ever propose to cut to offset their tax cuts? How did they propose to pay for Medicare part D? How did they propose to pay for two wars?

Posted by: klautsack | October 5, 2010 5:01 PM | Report abuse

"This is entirely consistent and it's one reason Bush economic policy was such a disaster. It doesn't take a genius to see that when the economy is strong and unemployment is low that you should be paying down debts and running small-to-nonexistent deficits. This in preparation for when the inevitable happens and the economy is not performing well and you need to provide additional help through government spending. It isn't rocket science'

No, it's not rocket science. It's also not what Krugman said either.


Krugman claimed that the deficits were bad in late 2002/early 2003, about a year after the prior recession (about where we are today).

He claimed that the economy was bad in 2004, realizing that he needed to in order for his boy Kerry to win.

He changed his tune about deficits not in 2008, but rather in 2006, when he realized that his Democrats were going to win Congress and needed to pay off their supporters.

And of course, team Obama now claims that deficits of 3% of GDP are 'sustainable' in the long term. Which is, of course, more deficits than we averaged during President Bush's tenure.

"He knew that by running huge deficits while he was in office that the day would come when the economy would tank, but we'd be too hard-up to do anything substantial about it and so, logically, all of the Republicans would chant in unison "It's the deficits!! It's always been the deficits!!". Quick quiz for you - what spending did the Republicans ever propose to cut to offset their tax cuts? How did they propose to pay for Medicare part D? How did they propose to pay for two wars?"

Nothing, of course. But that worked for Lyndon Johnson; Democrats don't seem to complain about massive Medicaid spending being paid out of the general fund.

Posted by: krazen1211 | October 5, 2010 5:20 PM | Report abuse

I might add, of course, that Medicare D wasn't even George Bush's idea.

It was originally Clinton's.

http://content.healthaffairs.org/cgi/reprint/19/2/212.pdf

Posted by: krazen1211 | October 5, 2010 5:26 PM | Report abuse

"This [Krugman's analysis] is entirely consistent and it's one reason Bush economic policy was such a disaster. It doesn't take a genius to see that when the economy is strong and unemployment is low that you should be paying down debts and running small-to-nonexistent deficits."

Let's check back to 2004 and see if this is true.

http://www.nytimes.com/2004/10/12/opinion/12krugman.html

"Mr. Bush will talk about the 1.7 million jobs created since the summer of 2003, and will say that the economy is "strong and getting stronger." That's like boasting about getting a D on your final exam, when you flunked the midterm and needed at least a C to pass the course."

"Mr. Bush is the first president since Herbert Hoover to preside over a decline in payroll employment. That's worse than it sounds because the economy needs around 1.6 million new jobs each year just to keep up with population growth."

"The labor force participation rate - the fraction of the population either working or actively looking for work - has fallen sharply under Mr. Bush; if it had stayed at its January 2001 level, the official unemployment rate would be 7.4 percent."

By the way, I wonder if Krugman will provide us with this same alternative unemployment calculation before the mid-term elections this year (by the way, the answer is 13.0 percent).

"On Friday, Mr. Bush claimed that he had increased nondefense discretionary spending by only 1 percent per year. The actual number is 8 percent, even after adjusting for inflation. Mr. Bush seems to have confused his budget promises - which he keeps on breaking - with reality."

Krugman even complains Bush broke his promise to keep a lid on nondefense discretionary spending!!!

"Mr. Bush will claim that the recession and 9/11 caused record budget deficits. Congressional Budget Office estimates show that tax cuts caused about two-thirds of the 2004 deficit."

Okay, here is the deficit complaint.

"But Bush wasn't ignorant. He knew that by running huge deficits while he was in office that the day would come when the economy would tank, but we'd be too hard-up to do anything substantial about it and so, logically, all of the Republicans would chant in unison "It's the deficits!! It's always been the deficits!!"

Or Bush believed that the economy would grow and close the deficit which is basically what happened - the deficit was down to 1.0% of GDP by April 2007 (and in surplus after taking out interest payments, which is now Obama's metric for deficit reduction success).

Bush didn't want the economy to crash - as you say, he's not ignorant, and I'm pretty sure he knew that he'd be blamed for a bust.

"Quick quiz for you - what spending did the Republicans ever propose to cut to offset their tax cuts? How did they propose to pay for Medicare part D? How did they propose to pay for two wars?"

Republicans spend like drunken sailors and aren't to be trusted, agreed here.

Posted by: justin84 | October 5, 2010 5:45 PM | Report abuse

justin84-

But the overall point remains. Bush ran deficits unnecessarily and that has hamstrung our ability to effectively combat this recession. Maybe he expected that the economy would grow its way out of deficits in six or so years (during an unsustainable housing bubble, no less), but the tax cuts and the ensuing deficits were unnecessary at the time and the did little-to-nothing to stimulate job creation.

Posted by: klautsack | October 5, 2010 5:57 PM | Report abuse

"Mr. Bush will talk about the 1.7 million jobs created since the summer of 2003, and will say that the economy is "strong and getting stronger." That's like boasting about getting a D on your final exam, when you flunked the midterm and needed at least a C to pass the course."

By the way, the economy has created 0.2 million jobs since the summer of 2009 (Sept09-Aug10). I wonder what grade Krugman would give.

Here is another fun Krugman column:

http://www.nytimes.com/2004/06/11/opinion/11KRUG.html

"Here's a sample version of the legend: according to a recent article in The Washington Times, Ronald Reagan "crushed inflation along with left-wing Keynesian economics and launched the longest economic expansion in U.S. history." Actually, the 1982-90 economic expansion ranks third, after 1991-2001 and 1961-69 — but even that comparison overstates the degree of real economic success.

The secret of the long climb after 1982 was the economic plunge that preceded it. By the end of 1982 the U.S. economy was deeply depressed, with the worst unemployment rate since the Great Depression. So there was plenty of room to grow before the economy returned to anything like full employment.

The depressed economy in 1982 also explains "Morning in America," the economic boom of 1983 and 1984. You see, rapid growth is normal when an economy is bouncing back from a deep slump. (Last year, Argentina's economy grew more than 8 percent.)"

You see, rapid growth is normal when an economy is bouncing back from a deep slump. Meanwhile, in 2010...

"And the economic expansion under President Reagan did not validate his economic doctrine. His supply-side advisers didn't promise a one-time growth spurt as the economy emerged from recession; they promised, but failed to deliver, a sustained acceleration in economic growth. "

Obama's economic advisors didn't even promise a sustained acceleration - they just said we'd get a temporary growth spurt, and we didn't even get that. The last four quarters saw GDP grow 3.0% vs. 8.5% from 1983Q2-1984Q1. Real final sales growth? Just 1.1% over the past four quarters vs. 5.4% from 1983Q2-1984Q1. We had better growth over the four quarters heading into Bush's re-election bid.

The rebound has been very weak even though the downturn was so deep and there is normally a huge rebound per Krugman. Krugman likes to claim that this time is somehow different due to a depressed economy - but somehow 1922 and 1934 still saw rapid growth out of a deflationary depression without anything near 2010 levels of stimulus/deficits.

By the way, the *relative* rate of growth for the U.S. economy did increase when compared to other economies which didn't adopt neoliberal policies (the European catch up to the U.S. ended around 1980).

Posted by: justin84 | October 5, 2010 6:04 PM | Report abuse

"Republicans spend like drunken sailors and aren't to be trusted, agreed here."

If you trust nothing else, trust that they don't like Barack Obama and that in itself should lower government spending back to 20% of GDP where it belongs.

Posted by: krazen1211 | October 5, 2010 6:06 PM | Report abuse

More Krugman:

http://select.nytimes.com/2006/12/22/opinion/22krugman.html?_r=1&hp

Iā€™m for pay-as-you-go. The question, however, is whether to go further. Suppose the Democrats can free up some money by fixing the Medicare drug program, by ending the Iraq war and/or clamping down on war profiteering, or by rolling back some of the Bush tax cuts. Should they use the reclaimed revenue to reduce the deficit, or spend it on other things?

The answer, I now think, is to spend the money ā€” while taking great care to ensure that it is spent well, not squandered ā€” and let the deficit be.

In the long run, something will have to be done about the deficit. But given the state of our politics, now is not the time.

I don't know what he meant by 'long run' but 5 years later he's singing the same song.

Posted by: krazen1211 | October 5, 2010 6:10 PM | Report abuse

"But the overall point remains. Bush ran deficits unnecessarily and that has hamstrung our ability to effectively combat this recession."

klautsack,

I would have loved to see the Krugman columns circa June 2003 when unemployment was 6.3% and Bush was trying to run a surplus. Would John Kerry have applauded Bush for running budget surpluses throughout his first term?

In any case, Krugman advocated stimulating housing in the early 2000s. Imagine if Bush had said in 2002 "okay, this housing thing could get a little messy, so I ask Congress to outlaw any mortgage without 15% down". Can you imagine the reaction from Krugman/Democrats in general? I can tell you it wouldn't have been "wow, what a wise and prudent President we have!" It would surely have been "poor people are being denied access to housing!"

As an aside, a few Krugman quotes on stimulating housing:

"In time this overhang will be worked off. Meanwhile, economic policy should encourage other spending to offset the temporary slump in business investment. Low interest rates, which promote spending on housing and other durable goods, are the main answer. But it seems inevitable that there will also be a fiscal stimulus package."

http://www.nytimes.com/2001/10/07/opinion/07KRUG.html

Even though Krugman felt the investment slump would be worked off in time, he wanted to stimulate housing anyway.

"The basic point is that the recession of 2001 wasn't a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble."

http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip.html?scp=4&sq=krugman%20mcculley%20bubble&st=cse

"ensuing deficits were unnecessary at the time and the did little-to-nothing to stimulate job creation"

This is true. Deficits do little or nothing to stimulate job creation, either in 2003 or 2009.

I'm not defending Bush's record, rather I am noting that a lot of the concern regarding Bush was hypocritical given support by Bush's critics for similar policies by the Obama administration.

Posted by: justin84 | October 5, 2010 6:35 PM | Report abuse

The bankers, who tend to be Republicans, are holding back on loans until after the election because they expect people who are suffering from the recession will vote out Democratic party Congressmen. A Fed chief a few decades ago said something about pushing on a string. Possibly the Fed could make loans directly to entreneuers(sp?). Yes, that might not be politically possible.

Posted by: toolatesmart1 | October 5, 2010 11:12 PM | Report abuse

krazen1211 and justin84 are the same person, right? Seems obvious.

Posted by: rick_desper | October 6, 2010 2:19 AM | Report abuse

This whole line of monetarist thinking, on both putatively liberal and conservative sides, completely and tragically misses the boat. No amount of manipulation of mere money, in whatever form, will prevent economic collapse. Why? Because the issue is the multi-trillion (or better quadrillion) speculative bubble in sundry and assorted so-called derivatives. This whole "bucket shop" monetary cancer was unleashed from a proverbial Pandora's box when Nixon pulled the plug on Roosevelt's Bretton Woods gold reserve mechanism to settle trade imbalances among nations. This led to a speculative arbitrage orgy in currencies a la the so-called carry trade. Later when the last vestige of that same Roosevelt era anti speculative Glass Steagall legislation was extinguished by the machinations of Larry Summers, et al, during the Clinton administration the doors were flung open to the current debacle. Without forcing this mass of speculative funny money through bankruptcy and returning to a credit system based upon long term survival of nations via productive investments in infrastructure, energy, water, industry and agriculture, everything else is mere whistling past the graveyard to the tune of London and Wall Street. Krugman, and his monetarist brethren, understanding less than nothing of how a physical economy functions, of course will have none of this. (They can only argue to blow up a bubble further, which just feeds the cancer.) But it is the only cure.

Posted by: rarnold1953 | October 6, 2010 8:59 AM | Report abuse

Regarding Gordon's gloom and doom prediction, it seems to be significantly based on the premise that "No technological revolution, like the internet, is on the horizon to juice growth either." As I recall, in 1990, everyone was talking about how America was no longer the leading economic power in the world, we were being surpassed by Japan and Germany, everyone was worrying about downsizing, etc. I went to college from 1991 and 1995, and all I knew about the internet was that these chat room things were really cool. I don't recall major outlets predicting a productivity revolution. (I also remember being in debate camp in 1986 and everyone thinking it was so cool when we realized we could get Playboy on microfiche, and that was just a decade away from the internet explosion.) Sure, there were some people probably talking about the internet circa 1990, but no more than peopole now talking about nanotechnology or biotechnology or green technology or whatever else. So I think it's simply impossible to predict doom and gloom based on "knowing" that there's no technological revolution on the horizon, and I'm surprised that a respected economist would imply otherwise.

Posted by: JamesCody | October 6, 2010 9:32 AM | Report abuse

The Fed under Bush left interest rates so very low, and fueled the housing bubble, even after the economy was recovered... When the recession came, and some room was needed to drop rates, they were already so very low. But we had a helluva bubble, did we not? Yes, we were riding high for awhile on borrowed money. Too bad the bill came due two months before Bush could slink out of office.

As for Medicare D being Clintons idea: its been two years since Bush was out of office, and you guys haven't quit blaming Clinton yet. When you gonna get over it? when the shoe was on the other foot and Obama came into office, it was a mere five weeks before Peggy Noonan was writing 'someday soon Obama is going to own this economy'...so apparently Republicans are never responsible for anything? No surprises there.

Posted by: underhill | October 6, 2010 2:34 PM | Report abuse

If Mr. Krazen/Justin actually read some of Paul Krugman's books and past columns there is both intellectual consistency but a refreshing ability to back up his views with facts and very good writing.

He doesn't pull punches from either side of the debate. For example, he is not particularly thrilled with Obama's actions on the stimulus. He agreed that the existing stimulus would help (and it has) but Paul was on record more than a year ago that it was inadequate to get the economy moving.

It looks like he was right. We need another stimulus now, and I only hope that Democrats come out in force to prevent the crazy people from taking over again. Obama isn't perfect but the last thing we need are more tax cuts and further slashing of the social net.

Posted by: geewhizbang | October 6, 2010 9:07 PM | Report abuse

"If Mr. Krazen/Justin actually read some of Paul Krugman's books and past columns there is both intellectual consistency but a refreshing ability to back up his views with facts and very good writing."

His writing isn't bad. But to put it charitably he is little but a partisan pundit. Krugman is pretty predictable if you follow current events and know which party is in power.

I have actually read quite a bit of Krugman, included the various columns cited here. Krugman was constantly beating up Bush for deficit spending (3.0% of GDP deficits) and a weak economy (5.5%-6.3% unemployment over 2003-2004). He even took a crack at Bush for breaking his promise to contain non-defense discretionary spending!

Now Krugman would have been consistent to say that Bush's deficits were irresponsible and that the economy was in good shape (after all, it was less than 6% for ~90% of Bush's first term). Or Krugman would have been consistent to praise Bush's deficits but lament the weak economy - or even to say his deficits weren't sufficient.

Of course, that isn't what happened. The deficits were too large and the economy too weak in 2003. Krugman even goes as far as to try to magnify what unemployment would have looked like in 2003 if the labor force participation rate would have stayed the same as it was in 2000. Do you think that same calculation will be made in one of his columns with Obama in office?

Put a Democrat in office and boom, and deficits many times larger are a-okay because the economy is weak. Krugman claimed he switched to a fixed rate mortgage in 2003 because he was terrified what would happen once the bond market became alarmed at rising debt levels!

Even more shocking for a Keynesian complaining of a weak economy, Krugman was upset with war spending (which I wouldn't disagree with), yet in other columns he talks about how World War II got the U.S. out of the Depression, and about 'multipliers' on spending.

http://www.nytimes.com/2003/03/11/opinion/11KRUG.html

Somehow, in a far worse fiscal situation, Krugman mocks those who fear invisible bond vigilantes! He seemed pretty afraid of those guys when the debt problem was no where near as bad. Look at that 2003 article again - Krugman actually describes a debt crisis in it!

http://krugman.blogs.nytimes.com/2010/06/27/invisible-friends/

"He doesn't pull punches from either side of the debate. For example, he is not particularly thrilled with Obama's actions on the stimulus. He agreed that the existing stimulus would help (and it has) but Paul was on record more than a year ago that it was inadequate to get the economy moving."

Or perhaps it is easier to claim victory if you say "well yes, this is good, but more would be better." It's the type of hedging you see in horoscopes. When Keynesian economists put a detailed forecast on paper to help sell ARRA, we saw how far off their predictions really are.

Posted by: justin84 | October 6, 2010 10:59 PM | Report abuse

"It looks like he was right."

Unless you can go find an alternative universe in which we can see how the dollars we borrowed for the stimulus would have been spent had there been no stimulus, I don't think we can say for certain.

I grant it is possible for fiscal stimulus to increase output. As an extreme example, all of ARRA could have been borrowed from people who were otherwise going to bury their money in the ground, then stimulus would have increased production quite a bit. Outside of that example, things get a bit more murky. It could still work, but the certainty that it does is quite a bit lower. This isn't the 1930s - not many people are stuffing their mattresses with cash these days.

On top of that, you must remember that stimulus takes dollars out of the productive sector and politicians try to redirect them back into the productive sector in a way that is more efficient - while telling the productive sector that they will need to pay a bill for all of this in the future. To me, this suggests healthy skepticism should be in order.

Finally, I don't think you can estimate multipliers to any degree of accuracy with a model. See this link for more detail:

http://econlog.econlib.org/archives/2010/02/macroeconometri_1.html

Posted by: justin84 | October 6, 2010 11:18 PM | Report abuse

Justin84, if you actually read or understood what Krugman was saying, you would understand that:

1. The stimulus worked, as far as it went, in about the proportion that the Keynesians like Krugman and others predicted.

2. It wasn't big enough.

3. We do have a savings glut right now. Banks are still not lending money, and about 10% of the economy is not productive because of weak demand.

4. Stimulus spending isn't wasted, especially if it gets spent on educations roads, and other infrastructure that we badly need.

5. Even though you can't predict the multiplier we can very well ascertain that there IS a significant multiplier for stimulus spending and it is much higher than what you get for tax cuts.

6. Stimulus spending does NOT take money out of the private sector.

It is really odd that the current deficit hawks cared nothing when Reagan, Bush I, Bush II ran them up during booms.

The current deficits are a structural problem of an underpowered economy. We can fix this by building roads, sewer systems, a better more sustainable energy system, public transportation and so much more. Once the economy is going, perhaps some tax and spend would be a good policy. Take a bit more from the wealthy, and spread it around to everyone else.

The wealthy will still be wealthy, but everyone else will be living more productive lives. We might be able to solve some real problems instead of fixing the ones the crazy policies of the last 20 years have created for us.


Posted by: geewhizbang | October 7, 2010 2:14 AM | Report abuse

"The stimulus worked, as far as it went, in about the proportion that the Keynesians like Krugman and others predicted."

How can you know it worked? You'd need to know what would have happened without the stimulus. The failure of these models to predict how bad the economy became show that we have no idea what the baseline is. Without a baseline, we cannot measure the effectiveness of the stimulus.

"It wasn't big enough."

It was too big. We clearly ran out of worthwhile projects if we were putting windows on unused buildings and repaving roads in good condition.

"3. We do have a savings glut right now. Banks are still not lending money, and about 10% of the economy is not productive because of weak demand."

A savings glut? Where is the current account deficit coming from? Domestic savings remain too low to finance domestic investment.

Note that one person has to *save* in order for the government to *borrow* and give it to another person to spend. Remember all of those companies sitting on cash (treasuries)? I'm sorry to say it, but someone with dollars had to save to make ARRA possible.

"4. Stimulus spending isn't wasted, especially if it gets spent on educations roads, and other infrastructure that we badly need."

You can cut education spending by 10% to no consequence. In fact, education could in theory be cut much more. We've nearly tripled the amount of money spent on education (per person, inflation adjusted) over the past generation with no change in results (other than slighly lower science scores).

http://www.cato-at-liberty.org/chart-of-the-day-federal-ed-spending/

Infrastructure like repaving perfectly fine roads and putting windows on unused buildings? Why, after $800 billion worth of stimulus, are there calls for more infrastructure spending? Maybe because the federal government wasn't able to direct money to the correct places?

"5. Even though you can't predict the multiplier we can very well ascertain that there IS a significant multiplier for stimulus spending and it is much higher than what you get for tax cuts."

Actually, you can't. The multiplier could well be zero or negative for either or both. It is *completely unknowable*.

From 1944-1946, a $1 trillion cut in government spending occurred simultaneously with a private sector spending surge of $300 billion. What's the multiplier?

"6. Stimulus spending does NOT take money out of the private sector."

Where does the money come from, trees?

"It is really odd that the current deficit hawks cared nothing when Reagan, Bush I, Bush II ran them up during booms."

It is also really odd that liberal deficit hawks criticized these much smaller deficits and at the same time criticized these Presidents for weak economies (retroactively now called booms - must have missed Krugman's 2004 column praising the strength of the Bush Boom).

Then again, they should have sharply cut spending - volia, no deficits!

Posted by: justin84 | October 7, 2010 11:43 AM | Report abuse

There have been various estimates by independent analysts that the stimulus saved/created the 3-4 million jobs that Obama (and even Krugman) predicted. Just because Justin84 lacks the ability to calculate multipliers doesn't mean that it is impossible to do so.

We live in a country with sewer and water systems in major cities that are up to 100 years old. The freeways here in Seattle were all built 30-50 years ago and need major repairs. This is true throughout the country. There have been major bridges that have collapsed with loss of life and many other similar bridges that are in equally poor condition all over the country that lack funding for maintenance and replacement.

I don't know how you get your numbers on education spending, but I see underpaid teachers, overly large class sizes, and huge rises in tuition even at state-run universities. That looks to me like we aren't spending enough.

We have spent 3 trillion dollars on wars, with nothing to show for it. But somehow spending $500 billion on infrastructure and education that we really need is too much for people like Justin84. The three trillion we wasted on the war would have bought a heck of a lot in jobs over here and in better education and social services, all of which are vitally needed.

The stimulus money has come from investors buying federal bonds, and was borrowed at very low long term interest rates. It basically takes money that wasn't in circulation and puts it back into circulation.

The years of tax cuts have had their effect. Our infrastructure is crumbling, and we are losing jobs to other countries because our education and political system is broken. There are good reasons to pay taxes for the common good. Government has to lead us out of this recession, it is not something that will happen without leadership and good policies.

Posted by: geewhizbang | October 8, 2010 3:37 AM | Report abuse

"There have been various estimates by independent analysts that the stimulus saved/created the 3-4 million jobs that Obama (and even Krugman) predicted. Just because Justin84 lacks the ability to calculate multipliers doesn't mean that it is impossible to do so."

I stand corrected. Apparently, Keynesians have access to a jiffy little machine which can travel between alternate universes so one can see how things would have turned out without stimulus. If you borrow $1,000 from me, how much does total spending increase? Wouldn't you need to know what I would have spent the money on had you not done so?

Please explain the rapid surge in private sector spending from 1921-1923 when the federal government cuts spending and runs surpluses.

Please explain why private sector spending stalled from 1940-1943 despite surging government spending.

Please explain why private sector spending surged from 1944-1946 when government spending was slashed.

The Fed used a model in 2006 to simulate a 20% decline in house prices. It found a minor impact. Do you believe that model, too?

http://econlog.econlib.org/archives/2010/10/finance_tarp_an.html

"I don't know how you get your numbers on education spending, but I see underpaid teachers, overly large class sizes"

The numbers are from the National Center for Education Statistics, Digest of Education Statistics 2007, table 162.

Throwing money at the problem somehow failed to solve any of our problems, yet you continue to advocate for it.

"and huge rises in tuition even at state-run universities. That looks to me like we aren't spending enough."

Why is tuition unaffordable to begin with? It's the government subsidies! That's what happens when you earmark tens of billions for an industry - prices soar. Now the subsidies have become unaffordable and people are getting screwed because of it.

"We live in a country with sewer and water systems in major cities that are up to 100 years old. The freeways here in Seattle were all built 30-50 years ago and need major repairs. This is true throughout the country. There have been major bridges that have collapsed with loss of life and many other similar bridges that are in equally poor condition all over the country that lack funding for maintenance and replacement."

Privatize the infrastructure. What on earth gives you confidence that infrastructure is best managed publicly when infrastructure is falling apart and "this is true throughout the country. There have been major bridges that have collapsed with loss of life and many other similar bridges that are in equally poor condition all over the country that lack funding for maintenance and replacement".

I'll give you that private ownership won't mean every bridge will be perfect and gold plated, but infrastructure won't be systemically crumbling across the country.

Posted by: justin84 | October 8, 2010 3:08 PM | Report abuse

"We have spent 3 trillion dollars on wars, with nothing to show for it. But somehow spending $500 billion on infrastructure and education that we really need is too much for people like Justin84."

As if you didn't get $800 billion to play with barely a year ago. Infrastructure is still falling apart, class sizes apparently still too large (as if we are certain class size is even the problem).

Yes, the Iraq War was a huge waste of money. So what? That doesn't mean you get to waste hundreds of billions more. What makes you think I approve of that disaster anyway?

Even if you get your way now, what's stopping the Palin Administration from plowing another $3 trillion into an Iranian boondoggle? The deficits remain crushing. The moderates will solemnly declare the government needs more money to cover all of this spending, and before you know it we have a 15% VAT to help pay for it all.

Posted by: justin84 | October 8, 2010 3:47 PM | Report abuse

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