Opinion

Paul Krugman: Now that we know stimulus works, we need to do more of it

11/5/2009 7:40:02 AM

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The good news is that the American Recovery and Reinvestment Act, aka 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.

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 GDP 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 3 million jobs -- but its peak impact on the growth of GDP (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, GDP 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.

OK, 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 appetite 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.

Paul Krugman, winner of the 2008 Nobel Prize for Economics, is a professor at Princeton University and a columnist for the New York Times.

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Lantern
rochester, mn

Posted on 11/5/2009 at 12:22:16 PM

This is a different world, Paul, and throwing more money at the economy is no longer a recipe for a successful outcome. We don’t even know exactly how much the stimulus program has really helped Main Street; although Wall Street sees opportunity to make gobs of money again. Perhaps the global population is just too large, perhaps the economy of capitalism is just to old, and perhaps the technilogical revolution is making more jobs obsolete; ergo, more people are going to remain unemployed longer than in the past. It’s about time that we tempered our expectations when it comes to economic growth. Maybe we had better get used to living a more simple life with less possessions. There are plenty of examples not only in the US but in many foreign nations where life is slower, people are healthier, and values are not tied to the almight dollar/euro/etc. But knowing the US, we will drown the economy in dollars until it resembles our concept of what is good and right. Who knows. Maybe this time around the global economy is too intertwined and we will have to create a new paradigm of business activity in order to preserve our way of life; whatever that might turn out to be.

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Paul Krugman: Now that we know stimulus works, we need to do more of it

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