Background Notes on Krugman’s critique of the Stimulus
- 11/8/2008. Krugman notes FDR’s “Net stimulus of around 3 percent of GDP — not much, when you’ve got a 42 percent output gap.”
- 11/10/2008. Krugman concludes the stimulus should be “at least 4% of GDP, or $600B.”
- 11/24/2008. Krugman: “with 3-plus percent (I hope) on the table in the US. Relative to GDP.”
- 12/16/2009. Key meeting to explain economy and stimulus to Obama. A that time Stiglitz had suggesting $1T, and Romer had analyzed 3 cases $600B, $800B and $1.2T. She believe that a bit over $1.2T was required to completely neutralize the recession. “The memo to Obama, however, detailed only two packages: a five-hundred-and-fifty-billion-dollar stimulus and an eight-hundred-and-ninety-billion-dollar stimulus. Summers did not include Romer’s $1.2-trillion projection. The memo argued that the stimulus should not be used to fill the entire output gap; rather, it was “an insurance package against catastrophic failure.” At the meeting, according to one participant, “there was no serious discussion to going above a trillion dollars.”
There were sound arguments why the $1.2-trillion figure was too high. First, Emanuel and the legislative-affairs team thought that it would be impossible to move legislation of that size, and dismissed the idea out of hand. Congress was “a big constraint,” Axelrod said. “If we asked for $1.2 trillion, it probably would have created such a case of sticker shock that the system would have locked up there.”
- 1/6/2009. Krugman analyzes a $775B stimulus with $300B in tax cuts and estimates: “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.”
- 1/6/2009. Krugman reports that Wall Street estimates that unemployment could peak at 8.4% in 2010 even with the stimulus.
- 1/7/2009. CBO estimates 9% peak unemployment (without the stimulus), which Krugman considers “too optimistic.” He notes that the Stimulus amounts to 3% of GDP compared to an 8% output gap, but he normally assumes a multiplier of 1.5 on stimulus so 3% would close a 4.5% gap.
- 1/10/2009. Romer & Bernstein come out with a graph showing unemployment peaking at 9% without the stimulus and earlier at 8% with the stimulus. He considers their estimate of the stimulus effect ” a bit more pessimistic than mine” but their estimate of the 9% no-stimulus peak “a lot more optimistic than I am.”
- 1/20/2009. Obama takes office.
- 1/28/2009. The House passes the stimulus bill.
- 2/4/2009. “when Obama finally introduced his economic plan he immediately began negotiating with himself, preemptively offering concessions to the GOP, which voted against the plan anyway.”
- 2/4/2009. Krugman “The Obama team today … seem[s] to have become suddenly aware that there’s a real risk that the stimulus plan will either fail to pass, or be emasculated to the point that it doesn’t come close to doing the job. Obama himself has warned of catastrophe if we fail to act, and — finally!– denounced the tax-cut philosophy.”
- 2/6/2009. Krugman: “”Shouldn’t Obama have made a much bigger plan, say $1.3 trillion, his opening gambit? If he had, he could have conceded to the centrists by cutting it to $1.2 trillion, and still have had a plan with a good chance of really controlling this slump.”
- 2/7/2009. Krugman: “So the original $800 billion plan was too small, … The plan should have been at least 50% larger.” “Now the centrists have shaved off $86 billion in spending — much of it among the most effective and most needed parts of the plan.”
- 2/9/2009. Senate votes for cloture 61-36, with 3 Republicans voting for it and 60 required.
- 2/8/2009. “I’ve gone through the CBO numbers a bit more carefully; they’re projecting a $2.9 trillion shortfall over the next three years. There’s just no way $780 billion, much of it used unproductively, will do the job.”
- 2/17/2009. Obama signs the stimulus bill (ARRA).
- 2/26/2009. “The stimulus bill is OK, though not big enough.”
- 7/9/2010. ” it looks as if top advisers convinced themselves that even in the absence of stimulus the slump would be nasty, brutish, but not too long. ” “And by the winter of 2008-2009, it was obvious that this was the Big One — which, if the aftermath of previous major crises was any guide, would be followed by multiple years of high unemployment.” “the now infamous Romer-Bernstein chart”
Krugman makes two criticisms of Obama:
- Obama should have known much more stimulus was needed.
- He should have known that he would not get a second chance.
Then he proves #1 like so: He should have know, because I knew and said so. I did the econ and graphs and it was obvious.
Well, yes K did say so, and it was obvious .,. to him. But …
Krugman has found it impossible to make it obvious to most economists and he is feeling extremely isolated and dejected because of this.
( I don’t blame him.) Moreover he even failed to persuade Christy Romer — although she was more on his side than the rest of the WH.
Krugman shows the “ the now infamous Romer-Bernstein chart” here and her estimate of 1.2 Trillion was not passed on to Obama,
and Krugman thinks 1.2 was still much too small. Now, what the Romer-Bernstein chart shows is that with the actual stimulus passed,
that unemployment would peak at 8% (less than now and that no it would be at 6% and dropping fast — ideal for the election.
So this is what Obama saw and he saw it from Christy — an economist highly approved by Krugman.
Moreover, the standard wisdom was that passing more than a $1 trillion stimulus was not feasible. This is quite plausible.
Also remember that because of automatic stimulus like unemployment insurance and also because of bailout money,
the US had already added about 1.5 trillion per year in deficit spending (to the pre-recession level $0.5 Trillion rate).
So no, Obama did not follow Krugman, and he did not go to the public and press for Krugman’s $3 Trillion stimulus bill,
but think what he did do.
On top of a deficit that was running at $2 Trillion a year (in fact more at that time), In just three weeks, Obama passed a stimulus that was slightly
larger than $800 Billion ($0.8Trillion) after being presented with a choice between $500 and $800B by his econ advisers.
In 3 weeks he spent more on stimulus than W spent on the Iraq war in 6 years.
Compare this to Roosevelt who came in and passed an austerity budget ! Or compare it to any other president.
No one had every tried anything like that. Or compare to Roosevelt in ’38 when he made the same mistake again — more anti-stimulus.
And Roosevelt’s WPA etc. was much smaller, even relative to the small US economy then, than Obama’s stimulus,
and it was not on top of huge automatic stimulus and bail out. Look at the US deficit under Roosevelt here. It does nothing until WWII.
Roosevelt never tried Keynesian econ, he just stumbled into WWII. Before that he help some of the unemployed,
but was careful not to help those most in need because he was afraid he would not be able to get them off the doll.
But was not trying to spend money to get the economy going — he never understood that.
Now Krugman wanted Obama to get on his bully pulpit and explain why $3 Trillion was needed — i.e. to explain Keyensian econ to the public.
But Krugman cannot even get mainstream economists (not the ideologues, the normal ones) to buy this after 3 years of yelling and screaming.
So read Klein about why the bully pulpit is not so magical.
So Krugman is miserable and sore that Obama didn’t see he was THE ONE with the right answer and help him sell it.
Now, I agree, Krugman did have the right answer, and I’m glad he’s screaming, but Obama did better than anyone has ever done,
and did go for a strong Keynesian policy, and did it incredibly fast. And it did make a difference.
Now on Krugman’s criticism #2. After repeating that many times, he finally refined it to say that
Obama should have known that he could not go back for more unless the first round made a noticeable difference.
And this is a more reasonable position.
But no one, not even Krugman, was telling Obama that $800 B would not make a noticeable difference.
Yes, people should have known — it’s always impossible to prove you did better than what would have happened,
but people thought you could track the job creation and prove it that way.
So, by Krugman’s newer, calmer reasoning, it was not obvious at the time,
that Obama could not go back for more.
So the bottom line is: This is not a nice world. Most people don’t want to take big risks to help the unemployed,
so it’s extremely hard to do that.
But Obama did take a big risk; he did try; he went $50 more ($850) than his top experts recommended,
and he didn’t hesitate — he acted quickly and decisively. Perhaps he could have gotten more — 1.5 Iraq wars —
or perhaps he just would have gotten bogged down. I’m sure there is no way he could have satisfied K.
No he’s not perfect, but I say we should count our blessing.
