On Tuesday, Capitol Hill played host to the historic Inauguration of President Barack Obama, with virtuous talk of bipartisanship, common good and putting aside "childish things" in promising the dawn of a new era in Washington. Less than 24 hours later, it was clear how little had actually changed, as Senators from both parties expressed growing frustration with Obama's top legislative priority, the $825 billon stimulus plan meant to jump-start the nation's ailing economy.
"This just can't be a grab bag of spending desires that have been unfulfilled for the last several years," Senator Evan Bayh, an Indiana Democrat, warned reporters in a corridor outside the Senate chamber. "It must create jobs."
"The bill really doesn't fit into what the Democrats [have] been talking about all along as timely, targeted and specific," Senator John Thune, a South Dakota Republican, lamented to another group of reporters around the corner, 20 minutes later. "It would take a significantly larger portion of tax relief to attract the support of a lot of Republicans."
Both these complaints were utterly bogus from a macro-economic perspective. Government spending creates demand--demand that the recession had destroyed. Creating demand was the number one imperative--and Obama's plan did too little, as Paul Krugman had already explained, just three days after the Politico piece, in "The Obama Gap". Krugman first took note of Obama's warning:
"I don't believe it's too late to change course, but it will be if we don't take dramatic action as soon as possible. If nothing is done, this recession could linger for years."
but warned himself:
But Mr. Obama's prescription doesn't live up to his diagnosis. The economic plan he's offering isn't as strong as his language about the economic threat. In fact, it falls well short of what's needed.
Bear in mind just how big the U.S. economy is. Given sufficient demand for its output, America would produce more than $30 trillion worth of goods and services over the next two years. But with both consumer spending and business investment plunging, a huge gap is opening up between what the American economy can produce and what it's able to sell.
And the Obama plan is nowhere near big enough to fill this "output gap."
.... To close a gap of more than $2 trillion - possibly a lot more, if the budget office projections turn out to be too optimistic - Mr. Obama offers a $775 billion plan. And that's not enough.
Now, fiscal stimulus can sometimes have a "multiplier" effect: In addition to the direct effects of, say, investment in infrastructure on demand, there can be a further indirect effect as higher incomes lead to higher consumer spending. Standard estimates suggest that a dollar of public spending raises G.D.P. by around $1.50.
But only about 60 percent of the Obama plan consists of public spending. The rest consists of tax cuts - and many economists are skeptical about how much these tax cuts, especially the tax breaks for business, will actually do to boost spending.
In a blog post a few days earlier, "Stimulus arithmetic (wonkish but important)", Krugman offered more detail.
[W]e're probably looking at a plan that will shave less than 2 percentage points off the average unemployment rate for the next two years, and possibly quite a lot less. This raises real concerns about whether the incoming administration is lowballing its plans in an attempt to get bipartisan consensus....
The starting point for this discussion is Okun's Law, the relationship between changes in real GDP and changes in the unemployment rate. Estimates of the Okun's Law coefficient range from 2 to 3. I'll use 2, which is an optimistic estimate for current purposes: it says that you have to raise real GDP by 2 percent from what it would otherwise have been to reduce the unemployment rate 1 percentage point from what it would otherwise have been. Since GDP is roughly $15 trillion, this means that you have to raise GDP by $300 billion per year to reduce unemployment by 1 percentage point.
Okun's Law is the fundamental economics that Republicans and Blue Dogs like Bayh completely ignore. In fact, it's safe to say they are utterly ignorant of it, just as they are ignorant of global warming and evolution. They deal in slogan-mongering, nothing more. But this is an essential fact about how economies work. It's not everything you need to know about how economies work, but unless you do know it, you are just as likely to make things worse as to make them better.
Krugman goes on to do rough calculations of what this all means:
Now, what we're hearing about the Obama plan is that it calls for $775 billion over two years, with $300 billion in tax cuts and the rest in spending. Call that $150 billion per year in tax cuts, $240 billion each year in spending.
How much do tax cuts and spending raise GDP? The widely cited estimates of Mark Zandi of Economy.com indicate a multiplier of around 1.5 for spending, with widely varying estimates for tax cuts. Payroll tax cuts, which make up about half the Obama proposal, are pretty good, with a multiplier of 1.29; business tax cuts, which make up the rest, are much less effective....
Let's be generous and assume that the overall multiplier on tax cuts is 1. Then the per-year effect of the plan on GDP is 150 x 1 + 240 x 1.5 = $510 billion. Since it takes $300 billion to reduce the unemployment rate by 1 percentage point, this is shaving 1.7 points off what unemployment would otherwise have been.
Finally, compare this with the economic outlook. "Full employment" clearly means an unemployment rate near 5 - the CBO says 5.2 for the NAIRU, which seems high to me. Unemployment is currently about 7 percent, and heading much higher; Obama himself says that absent stimulus it could go into double digits. Suppose that we're looking at an economy that, absent stimulus, would have an average unemployment rate of 9 percent over the next two years; this plan would cut that to 7.3 percent, which would be a help but could easily be spun by critics as a failure.
Of course things turned out much worse than that. But that's just the point. Krugman wasn't being a tremendous pessimist. He was much more like the early critics of the Vietnam War, who were, in retrospect, far too timid in the objections they raised. But that's what "responsible critics" normally do: They err on the side of caution.
And that's just what Krugman did. He wasn't saying, "What if something terrible happens?" He was saying, "What if things go exactly as planned?"
Why weren't any of Obama's advisors saying that?
Krugman then turned his eye to politics, with the same approach--not "What if something terrible happens?", but "What if things go exactly as planned?":
And that gets us to politics. 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."
Let's hope I've got this wrong.
But of course, he didn't---except that things went even worse than he imagined, which only made the consequences even worse.
Of course we cannot blame Obama alone. The press was perfectly idiotic. Just to skim the surface, here's a Feb 1, 2009 blog post from Dean Baker's insanely long-running "Beat The Press" series (then at the American Prospect):
More Weak Knee Problems at the Post on Stimulus
The Washington Post again tells us that the stimulus is "staggering." Just a few days ago they told readers that it was "breathtaking in size and scope."
It might be helpful to tell readers that the collapse of the housing industry has lead to a $450 billion falloff in the pace of annual residential construction, the loss of $8 trillion in housing wealth will reduce annual consumption by around $450 billion, with the loss of $8 trillion in stock wealth leading to a further decline in annual consumption of $250 billion. In addition, the collapse of the non-residential real estate bubble will likely reduce annual demand by another $200 billion. This gives us a total decline in annual demand of around $1350 billion or $2,700 billion over two years.
Next to a demand loss of $2,700 billion, an $825 billion stimulus package seems rather small. The Post might try to look for reporters who are better at arithmetic and more sure in their footing.
Paul Krugman took note of Baker's blog post, then added:
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.
And, if the Post's reporting was bad, it's opinion pages were downright criminal, as Baker's very next blog post ("The Washington Post Prints More Nonsense on the Economy") showed:
If the Washington Post had a science section it would be filled with accounts of creationism and the latest thoughts from the Flat Earth Society. This is the only conclusion that one can get from reading its treatment of economics in the Outlook section.
Readers may recall the memorable Donald Luskin piece of September 14th telling readers that the economy was just fine. In keeping with this proud tradition, the Outlook section has a front page piece from Amity Shlaes telling readers that the New Deal didn't work....
Baker explained in some detail why Shlaes was full of it, but perhaps most telling was this simply chart appended at the end:
For folks who think that the growth in federal spending under Roosevelt and the recovery were just coincidence, here is the annual growth in federal government spending, alongside the following year's GDP growth:...
1932 2.2% 1933 1.3%
1933 23.7% 1934 10.8%
1934 34.2% 1935 8.9%
1935 1.7% 1936 13.0%
1936 51.0% 1937 5.7%
1937 -10.0;% 1938 -3.4;%
1938 10.4% 1939 8.1%
1939 7.2% 1940 8.8%
1940 12.0% 1941 17.1%
So yes, the press was idiotice. But it's the President's job to deal with that. It's the President's job to do what's necessary for the good of the country and to explain why it's necessary. What's more, he could have enlisted enormous support on his own behalf. The points that Krugman and Baker were making above were quite straightforward. A literal army of economists could have been employed in supporting and defending a much more robust stimulus plan. The facts--and economic history--were all on one side.
Coda
On January 9, 2009, Think Progress ran a piece, "Obama: 'If Paul Krugman has a good idea...then we're going to do it.'" But the ellipsis hid more than it revealed. Here's the quote, following a more typical passage where he welcomes "good ideas" from Republicans and Democrats alike:
If Paul Krugman has a good idea, in terms of how to spend money efficiently and effectively to jump-start the economy, then we're going to do it. If somebody has an idea for a tax cut that is better than a tax cut we've proposed, we will embrace it. So, you know, one of the things that I think I'm trying to communicate in this process is for everybody to get past the habit that sometimes occurs in Washington of whose idea is it, what ideological corner does it come from. Just show me. If you can show me that something is going to work, I will welcome it.
But, of course, Krugman wasn't primarily offering ideas "in terms of how to spend money efficiently and effectively". He was offering ideas of an entirely different order. He was offering ideas about the overall magnitude of the stimulus and its dramatic inadequacy, such that even the best spending ideas in the world couldn't possibly be good enough to make up for the puny size. And he was also offering ideas about the folly of including highly inefficient tax cuts as part of the mix.
So this is how Obama appears to be open-minded to all, even as he categorically rejects the one option that could possibly help solve the problem.
As it was then, so it is now.
Obama is open to ideas from every quarter. Except, of course, from the realm of reality, and the polarizing partisans who dwell there. |
