Conquer Club

Next week, President Obama is scheduled to propose new measures to boost the economy. I hope they’re bold and substantive, since the Republicans will oppose him regardless — if he came out for motherhood, the G.O.P. would declare motherhood un-American. So he should put them on the spot for standing in the way of real action.

But let’s put politics aside and talk about what we’ve actually learned about economic policy over the past 20 months.

When Mr. Obama first proposed $800 billion in fiscal stimulus, there were two groups of critics. Both argued that unemployment would stay high — but for very different reasons.

One group — the group that got almost all the attention — declared that the stimulus was much too large, and would lead to disaster. If you were, say, reading The Wall Street Journal’s opinion pages in early 2009, you would have been repeatedly informed that the Obama plan would lead to skyrocketing interest rates and soaring inflation.

The other group, which included yours truly, warned that the plan was much too small given the economic forecasts then available. As I pointed out in February 2009, the Congressional Budget Office was predicting a $2.9 trillion hole in the economy over the next two years; an $800 billion program, partly consisting of tax cuts that would have happened anyway, just wasn’t up to the task of filling that hole.

Critics in the second camp were particularly worried about what would happen this year, since the stimulus would have its maximum effect on growth in late 2009 then gradually fade out. Last year, many of us were already warning that the economy might stall in the second half of 2010.

So what actually happened? The administration’s optimistic forecast was wrong, but which group of pessimists was right about the reasons for that error?

Start with interest rates. Those who said the stimulus was too big predicted sharply rising rates. When rates rose in early 2009, The Wall Street Journal published an editorial titled “The Bond Vigilantes: The disciplinarians of U.S. policy makers return.” The editorial declared that it was all about fear of deficits, and concluded, “When in doubt, bet on the markets.”

But those who said the stimulus was too small argued that temporary deficits weren’t a problem as long as the economy remained depressed; we were awash in savings with nowhere to go. Interest rates, we said, would fluctuate with optimism or pessimism about future growth, not with government borrowing.

When in doubt, bet on the markets. The 10-year bond rate was over 3.7 percent when The Journal published that editorial; it’s under 2.7 percent now.

What about inflation? Amid the inflation hysteria of early 2009, the inadequate-stimulus critics pointed out that inflation always falls during sustained periods of high unemployment, and that this time should be no different. Sure enough, key measures of inflation have fallen from more than 2 percent before the economic crisis to 1 percent or less now, and Japanese-style deflation is looking like a real possibility.

Meanwhile, the timing of recent economic growth strongly supports the notion that stimulus does, indeed, boost the economy: growth accelerated last year, as the stimulus reached its predicted peak impact, but has fallen off — just as some of us feared — as the stimulus has faded.

Oh, and don’t tell me that Germany proves that austerity, not stimulus, is the way to go. Germany actually did quite a lot of stimulus — the austerity is all in the future. Also, it never had a housing bubble that burst. And with all that, German G.D.P. is still further below its precrisis peak than American G.D.P. True, Germany has done better in terms of employment — but that’s because strong unions and government policy have prevented American-style mass layoffs.

The actual lessons of 2009-2010, then, are that scare stories about stimulus are wrong, and that stimulus works when it is applied. But it wasn’t applied on a sufficient scale. And we need another round.

I know that getting that round is unlikely: Republicans and conservative Democrats won’t stand for it. And if, as expected, the G.O.P. wins big in November, this will be widely regarded as a vindication of the anti-stimulus position. Mr. Obama, we’ll be told, moved too far to the left, and his Keynesian economic doctrine was proved wrong.

But politics determines who has the power, not who has the truth. The economic theory behind the Obama stimulus has passed the test of recent events with flying colors; unfortunately, Mr. Obama, for whatever reason — yes, I’m aware that there were political constraints — initially offered a plan that was much too cautious given the scale of the economy’s problems.

So, as I said, here’s hoping that Mr. Obama goes big next week. If he does, he’ll have the facts on his side.

Phatscotty wrote:The stimulus plan was too small? at a time when we have to borrow just to pay interest on our debt? we can't even service our debt without going deeper into debt.

The stimulus propelled our budget deficit, in 1 year, as much as the 4 worst years of deficits 2000-8, which were ALL record setters themselves. Until 2009, and 2010, Biggest deficit ever (by over 200%!)

Not enough! BWAhaha, Krugz can suck a phat one. I eat Krugz for breakfast

SgtMadDog wrote:The guy doesnt view economics as a science, he bends economics to fit his politics and therefore cannot be trusted.
if it wasnt for that nobel prize he'd be getting paid $10 an hour to fill out someones EZ1040 and the country wouldnt have to suffer through his political experiments.

You know when they nominated Barack Obama for the peace prize even before he entered the White House that the prize has lost all meaning! UGHH

InkL0sed wrote:Well, now that we've shaken out all of that ghastly ad hominem out of our systems, I'd love to hear your well-reasoned, rational rebuttals of his points. I am all ears.

InkL0sed wrote:

SgtMadDog wrote:The guy doesnt view economics as a science, he bends economics to fit his politics and therefore cannot be trusted.
if it wasnt for that nobel prize he'd be getting paid $10 an hour to fill out someones EZ1040 and the country wouldnt have to suffer through his political experiments.

You know when they nominated Barack Obama for the peace prize even before he entered the White House that the prize has lost all meaning! UGHH

I quote myself for emphasis:

InkL0sed wrote:Well, now that we've shaken out all of that ghastly ad hominem out of our systems, I'd love to hear your well-reasoned, rational rebuttals of his points. I am all ears.

Hopefully you can overcome your hatred and enter the debate. Don't disappoint me!

InkL0sed wrote:Well, now that we've shaken out all of that ghastly ad hominem out of our systems, I'd love to hear your well-reasoned, rational rebuttals of his points. I am all ears.

Phatscotty wrote:can't wait to address when you agree to my condition...

why did you call me out with a spork sword? Better be the truth...

It's been 6 months. I think you can tell me now. Until then you can't say shit about me ducking nutt

InkL0sed wrote:

Phatscotty wrote:can't wait to address when you agree to my condition...

why did you call me out with a spork sword? Better be the truth...

It's been 6 months. I think you can tell me now. Until then you can't say shit about me ducking nutt

I don't understand. What does this have to do with the stimulus?

InkL0sed wrote:Well, now that we've shaken out all of that ghastly ad hominem out of our systems, I'd love to hear your well-reasoned, rational rebuttals of his points. I am all ears.

DangerBoy wrote:

InkL0sed wrote:Well, now that we've shaken out all of that ghastly ad hominem out of our systems, I'd love to hear your well-reasoned, rational rebuttals of his points. I am all ears.

Any nation which does not restrain its spending budget will eventually have to deal with a vicious cycle of rising borrowing costs, more debt and deficit, and worse credit risks. Krugman seems to think that doing more spending will somehow not lead to these things. How do you argue against someone who wants to exceed what has already been shown to be a failure? Are we really to believe that a deficit of about 3 times more than what we had in 2009 would bring about a healthy economy!

mpjh wrote:1 trillion of that deficit was borrowed money to fund the lost wars in Afghanistan and Iraq. That money did not create any infrastructure or investment in this country, except in the pockets of Haliburton and defense firms. 1 trillion of that deficit was to bail out the favored wall street firms of George W after his administration totally fucked the economy.

Maybe it is time to try and spend some money on repairing the country instead of destroying it and the world economy. If we don't get the economy kick-started we get deflation. You know, some call it depression, and we will not be calling it the Great Recession.

mpjh wrote:1 trillion of that deficit was borrowed money to fund the lost wars in Afghanistan and Iraq. That money did not create any infrastructure or investment in this country, except in the pockets of Haliburton and defense firms. 1 trillion of that deficit was to bail out the favored wall street firms of George W after his administration totally fucked the economy.

Maybe it is time to try and spend some money on repairing the country instead of destroying it and the world economy. If we don't get the economy kick-started we get deflation. You know, some call it depression, and we will not be calling it the Great Recession.

mpjh wrote:Do you silly nits actually think we won in Iraq. If you would watch something besides fox, you might get some facts -- no sewage -- no electricity -- civil war continues with sunnis -- oil companies from Russia and China got bulk of oil deals -- Iranians have more influence now in Iraq than in last 100 years. That is winning?

Night Strike wrote:Then maybe the left shouldn't have screamed for so long to get out of there if it's still in horrible shape.