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Posted at 10:43 AM ET, 12/ 9/2010

The case for a tow

By Ezra Klein

Paul Krugman doesn't like the recovery metaphors that talk about jump-starts or pump-priming. The economy, he says, doesn't need a shock. It needs time. And the role of stimulus is to give it that time:

More than a year ago, I warned that the spate of relatively good growth news occurring then was only reassuring if you believed that the economic engine had caught, so that we didn’t need to worry about what would happen as stimulus faded away. The problem was that there was no good reason to believe that. As I have since tried to point out more formally in my work with Gauti Eggertsson, the best interpretation of our current difficulties is that we’re suffering from a deleveraging shock, and that the economy will need support until over-leveraged players have had time to work down their debt. That logic implies that you need a tow, not a jump-start; the economy is going to need help for an extended period of time.

This has big, uncomfortable implications for the Obama-McConnell deal. More in another post.

I think this is the post he was teasing.

By Ezra Klein  | December 9, 2010; 10:43 AM ET
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Next: The payroll tax cut, Social Security and the problem of the trust fund


Ezra, good of you to link to the column. It points out what I have always maintained in these pages, namely that Krugman is a political economist, not a financial one. His models are always skewed toward the election results he wishes to achieve.

Posted by: 54465446 | December 9, 2010 10:52 AM | Report abuse

Seems like training wheels might be a good metaphor. Stimulus keeps the economy upright until it steadies itself and doesn't need the help. Then the training wheels come off and the economy is happy until the bike gets stolen because the kid didn't lock it up properly. Ok, admittedly, at that point the metaphor breaks down a bit...

Posted by: MosBen | December 9, 2010 10:54 AM | Report abuse


Is Wall Street the bike thief?

There isn't really much stimulus in this package. Very little will change from 12/31, to 1/1. A few more dollars saved in payroll taxes for the average workers, some investment credit brought forward calendar wise for business, dead people will pay less to the government.

What am I missing in all this stimulus talk?

Posted by: 54465446 | December 9, 2010 11:02 AM | Report abuse

Unemployment insurance that keeps money going into the economy is important, I think, but again, that's why I like the training wheels metaphor: Stimulus doesn't force the economy to take off on its own. It keeps the economy from crashing until business picks back up and takes off on its own.

I'm certainly no economist, but that's the idea I've gotten over the last couple years. Stimulus keeps you from going over the cliff, and it steadies the economy during the downturn and recovery, but it's really about waiting until the economy heals itself then "jump starting" it.

Posted by: MosBen | December 9, 2010 11:10 AM | Report abuse


But we were already paying out the UE insurance, so in effect what we're calling stimulus is really as opposed to some mythical financial armageddon that we warded off.

Rick Santelli, in his own picturesque way this morning compared the package to stepping into the street and not getting hit by a bus. It's great that you didn't get killed, but it hasn't changed your life in any other way.

Posted by: 54465446 | December 9, 2010 11:16 AM | Report abuse

That sounds right to me, but again, I'm not an expert.

But it also seems like most of the economic forcasts for the next couple years assumed no such deal would be made. The economy will be better off, supposedly, than anyone is expecting because of the deal.

If we're going to torture some more metaphors here, maybe in Santelli's passing this compromise is like getting to start from the middle of the road rather than the far side. There's still danger, but you've avoided a big chunk of the danger.

Posted by: MosBen | December 9, 2010 11:22 AM | Report abuse

Speaking of Krugman, "willow" pointed out in a post yesterday that he said not to worry about rising Treasury yields they were unimportant because they had ONLY risen back to the level of June.

Here's a different opinon:

"The 10-year note yield advanced 15 basis points, or 0.15 percentage point, to 3.28 percent at 12:28 p.m. in New York, according to BGCantor Market Data. Yields are up 35 basis points the past two days, the most since after the collapse of Lehman Brothers Holdings Inc."

"Trading patterns suggest the 10-year U.S. Treasury note yield is poised to rise to 4 percent in the next three months if it remains above 3.1 percent on a weekly closing basis, according to Citigroup Inc.

“We’ve come up a long ways in a short space, but if we get that close on a weekly basis we could see a continued push to 4 percent in the first quarter,” Tom Fitzpatrick, chief technical strategist at Citigroup in New York said in an interview. “The danger would be quicker than people think"

Note, the fastest two day rise since Lehamann. There's an auction at 1 PM today on the 30 year, so we'll see about that one.

Here's an additional note from this morning:

"Rates on fixed mortgages rose for the fourth straight week this week, hitting 4.61 percent. The surge could slow refinancings and further hamper the housing market."

This is of course, for the uninitiated, because fixed rates are tied to the 10 year Treasury.

All of the above proves, once again, that Krugman does not know his you know what from a hole in the ground!

Posted by: 54465446 | December 9, 2010 11:27 AM | Report abuse

30 year Treasury auction went well. 10 year yields have dropped about 7 basis points since yesterday. Looks like we're still on track to close the week at the 3.1 or higher that Fitzpatrick talked about above. Of course you never know how much of that buying was done by the government to stabilize the rates.

Rates on the on fixed mortgages won't change much at all for Friday.

Posted by: 54465446 | December 9, 2010 1:12 PM | Report abuse

This sounds a lot like defining the success of Keynesian economics down.

Almost all "classical" Keynesian texts that I have read refer to pump priming, aka the ability of the "multiplier" effect of government spending to create a self sustaining economic recovery through boosting demand.

Now it sounds like Krugman's argument is that Keynesian spending can't actually create a self sustaining recovery, it just helps ameliorate the effects of the deleveraging until the business cycle comes back around again.

This undermines one of the Keynesian arguments made against tax cuts versus spending programs, namely that tax cuts are likely to be saved instead of spent. If the recovery won't truly be self sustaining until the consumer and business deleveraging is complete, then policies that boosts savings are desirable in that they will shorten the time period required for the deleveraging.

See also Fareed Zakaria's piece on the limitations of boosting demand as a way to create sustainable economic growth.

Posted by: jnc4p | December 9, 2010 2:28 PM | Report abuse

@54465446 "Ezra, good of you to link to the column. It points out what I have always maintained in these pages, namely that Krugman is a political economist, not a financial one. His models are always skewed toward the election results he wishes to achieve."

More grist for your opinion. Krugman pretty much states your point explicitly:

"On the straight economics, the tax deal is worth doing. But the history of the past two years drives home, if anyone doubted it, that economic policy must be considered from a political economy point of view; that you have to think ahead to how current policies affect the environment in which future policies will be decided. And the more I work on this, the more concerned I’m becoming."

Posted by: jnc4p | December 9, 2010 2:45 PM | Report abuse


This is a genuinely big deal, but somehow not as sexy as name calling about liberal or conservative. My guess is public awareness stays dormant until we increase a full point on mortgage rates, and then everyone will be asking how this happened.

Posted by: 54465446 | December 9, 2010 3:16 PM | Report abuse

A few things regarding Krugman:

He viscerally dislikes President Obama. Not as a politician, but as a person. As if there is some long-standing beef betwixt them. One has to wonder, based on some of the things Krugman has said or written about the President, from where that deep-seated personal dislike stems.

Aside from making pontifications, Krugman lacks any real understanding of the political calculus necessary to craft any legislation or develop any consensus. He seems to think that you "just do it." That if you want a huge $1.5 trillion dollar stimulus package, you just say so. He doesn't seem to get that negotiation is always a part of the deal. That if the Republicans said no stimulus, period, and the President said $1.4, the happy medium is $700 billion.

I don't know the man, but he strikes me as the kind who has a short fuse and is hotheaded. The kind who shoots "from the lip" first and then apologizes later. If I recall, his tenure in the Clinton White House -- or Clinton economic circle -- was short-lived because he wasn't much of a team player.

Regarding Krugman's car analogy: sometimes you need both a jump start and a tow.

Posted by: jade_7243 | December 9, 2010 6:14 PM | Report abuse

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