Krugman and the National Debt

[Peacetrain]

I know there has been a lot of debate about Krugman's policies and Obama policies. Now the one thing that I understand about Krugmans position is that he did not think Obama put enough money in the stimulus package.

I have to be honest here..we maybe up ship creek with debt into the trillions we have now. Krugman being upset because there has not been more spent.. well.. I have just not heard a lot about that being addressed.

There is a limit to what we can print and get other countries to cover for us.

[MercutioATC]

1. Krugman wanted more actual stimulus spending and fewer tax cuts.

The way I read him, it was less about the total size of the package than the content.

...but no, I don't think he places sufficient importance on the national debt.

[depakid]

2. Krugman and MANY others wanted to fill the output gap

Which is the logical thing to do to preserve enough demand to keep the recession from deepening:

His words:

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 U.S. economy can produce and what it's able to sell. And the Obama plan is nowhere near big enough to fill this "output gap."

arlier this week, the Congressional Budget Office came out with its latest analysis of the budget and economic outlook. The budget office says that in the absence of a stimulus plan, the unemployment rate would rise above 9 percent by early 2010, and stay high for years to come.

Grim as this projection is, by the way, it's actually optimistic compared with some independent forecasts. Obama himself has been saying that without a stimulus plan, the unemployment rate could go into double digits. Even the CBO says, however, that "economic output over the next two years will average 6.8 percent below its potential." This translates into $2.1 trillion of lost production. "Our economy could fall $1 trillion short of its full capacity," declared Obama on Thursday. Well, he was actually understating things.

To close a gap of more than $2 trillion - possibly a lot more, if the budget office projections turn out to be too optimistic - 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 GDP 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. (A number of Senate Democrats apparently share these doubts.)

Howard Gleckman of the nonpartisan Tax Policy Center summed it up in the title of a recent blog posting: "lots of buck, not much bang."

The bottom line is that the Obama plan is unlikely to close more than half of the looming output gap, and could easily end up doing less than a third of the job. Why isn't Obama trying to do more? Is the plan being limited by fear of debt? There are dangers associated with large-scale government borrowing - and this week's CBO report projected a $1.2 trillion deficit for this year.

But it would be even more dangerous to fall short in rescuing the economy. The president-elect spoke eloquently and accurately on Thursday about the consequences of failing to act - there's a real risk that the U.S. will slide into a prolonged, Japanese-style deflationary trap - but the consequences of failing to act adequately aren't much better.

More: http://www.iht.com/articles/2009/01/09/opinion/edkrugman.php

[SanchoPanza]

3. Investment

The main argument for more stimulus revolves around the expected loss the economy will face in the coming years. Unless the numbers have changed recently, the expectation is that around two trillion dollars will be lost between the beginning of 2009 and the end of 2010. Krugman and others argue that, in order to keep the economy stable, the government has to deficit spend and help make up this shortfall.

The downside is that this practice is intrinsically inflationary. But the even larger problem is deflation, due to a fall in commodity prices and a slack in the markets for labor and goods. This will increase globally as the rest of the world is impacted by the recession, especially in emerging markets. If you go through a lot of the economic blogs over the past few months, the common response to inflation concerns is generally along the lines of "We should be so lucky."

[QC]

4. Krugman is an enemy of the people. n/t

[SanchoPanza]

5. But the water is poisoned!

Every time I reread Ibsen, I always come away with the feeling that his critique of popular politics is unnecessarily draconian. His lumping together of Victorian conservatism and nascent populism as equally self-serving and damaging to the community as a whole, as drowning out individual criticisms of either movement, is very excessive. Almost ideological.

Then I read stuff like this, and I fear he may have been right.