Why We Need Another Stimulus Bill

Tuesday, July 06, 2010 21:22
Why We Need Another Stimulus Bill


Nobel Laureate and New York Times columnist Paul Krugman says we need another stimulus, about the same size as the first one--$700 billion.  Krugman’s voice is drowned out by cries for austerity from almost all Republicans, many Democrats, and most of the leaders of the G20. Personally, I think Krugman’s right on the money.

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Political forces make it impossible for the Obama Administration to put forward another stimulus bill. Obama’s already facing the possibility of losing control of the House of Representative in November’s midterm elections. Democrats now have 257 seats in the House, 39 more than minimum needed for control.

But midterm elections can be unkind to first-term Presidents. So it is politically untenable for President Obama to risk losing more seats in the House by proposing more economic stimulus spending—even if that’s what history shows is the right thing to do

Krugman won the 2008 Nobel Prize for economics for his contributions in the field of international economics, not for his work on financial crises. But he’s studied the history of bubbles.

Moreover, he has some smart friends who are known for their work on economic crises: Krugman was recruited to join Princeton in 2000 by the chairman of the school’s economics department, who had written extensively about the causes of The Great Depression—current Fed Chairman Ben Bernanke.    

With consumer confidence, housing, jobs and other leading indicators telling us the economy is getting weaker, I think Krugman is right.

The government needs to create a long-term plan for fixing Social Security and closing the deficit. But now is not the time for austerity measures.

The $700 stimulus kept the world economy from disaster. But without another stimulus, we could be subjected to the same kind of economic malaise that’s gripped for the last two decades.

The Great Depression was worsened by Herbert Hoover’s distaste for government spending and regulation, and he is remembered as one of the most unpopular president in American history.

The Depression was ended by government spending on World War II. We know that.

Yet political realties seem to doom us to repeat the same mistakes as Hoover.

Is Krugman right? Do we need another stimulus? How could we ignore lessons of the past?

Charlie Rose’s 29-minute interview of Paul Krugman.


Comments (19)

I don't know that I would label a 57% increase in spending over 4 years as distaste for spending; or the armtwisting of business owners and signing of a tariff bill that took trade back to levels not seen in 20 years as disdain for regulation.

Ignoring the results of those actions by generalizing Hoover as 'laissez-faire' simply because he was slightly more than the next guy is the real problem today. Murray N Rothbard wrote the book on Hoover and the Great Depression. I'm sure Krugman hasn't read it.

"We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and now if I am wrong somebody else can have my job. I want to see this country prosper. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. I say after eight years of this administration, we have just as much unemployment as when we started. And enormous debt to boot." FDR's Treasury Secretary Henry Morgenthau
rschmansky , July 07, 2010
I can't be as sure as you are about what Krugman has read or not read.

But I am sure that a lack of regulation helped land us in this mess--failure to regulate Wall Street's highly leveraged bets on mortgage securities and failure to regulate the mortgages consumer were encouraged to buy.

The quote you mention from Morgenthau, which by the way was mentioned in a Glenn Beck blog post just last week, came from a 1939 Congressional hearing. It was massive deficit spending on WWII that jolted the economy out of the Great Depression, not New Deal spending.

I agree with you that in times of plenty--like the Clinton and Bush years--government programs irresponsibly failed to address the long-term Social Security funding issue even as spending soared.

But austerity now is not the answer. This is not just another cyclical recession. As you pointed out, unemployment at 9.7% has consumers fearful and they have no reason to start feeling confident and spend again. Banks are not lending. Rates cannot go lower. We are headed for long-term economic malaise and, worst of all, deflation unless something kickstarts the economy.

Linking another stimulus to a long-term resolution of the deficit would be great. We could aim to jumpstart the economy over the next two years while also mandating cuts in the deficit that begin five years from now after growth returns to the economy. But we need economic growth to cut the deficit.

In early 2009, I interviewed Martin Wolf, the associate editor and chief economics commentator at the Financial Times and one of the world’s most influential financial journalists. He told me then that the spending bill proposed by the Administration was too small by half. At the time, I thought he was nuts. Now, I think he was dead on.

Here's a snippet of what Wolf said about the then-proposed $800 billion spending package, which was susequently reduced to $700 billion in final form.

"It’s $800 billion over two years, so it’s $400 billion a year, roughly. I think many people in America seem not to understand how big their own economy is, so they get a bit confused by all this. The U.S. economy is roughly $14 trillion a year. That’s $14,000 billion a year. Eight hundred billion dollars, therefore, is about 6% of GDP. Over two years, that’s 3% of GDP a year. In the context of a massive downshift in private spending, which is the main reason for the fiscal deficit today, a 3%-a-year stimulus is going to be an inadequate offset."

Read the rest of what Wolf said at http://bit.ly/wolfint.

agluck , July 07, 2010
Here's where I part company with you, Andy. Not only am I not enthusiastic about Paul Krugman, but I don't think Ben Bernanke is any genius either.

Let's suppose Martin Wolf is right that the $700 billion stimulus was too small. It's too late now, after that money has been flushed down the toilet, to strap on a bigger burden that we'll never be able to unload. I know lots of people who are still unemployed, after all this stimulus; several of them are in my family.

Do you really think that the Dodd-Frank bill will solve anything on Wall Street? Or that the health-care bill will solve anything in medicine? Or that government regulation is the answer?

I've been a Democrat all my life. Even Jimmy Carter didn't force me out of the fold. Now I'm an independent hoping that the country won't be destroyed.
mrowland , July 07, 2010
I think Bernanke kept the economy from disaster.

And I don't think the stimulus has been flushed down a toilet. (See http://www.recovery.gov) It saved us from a much higher unemployment rate and a much worse fate.

I'm not political. I'm not a Republican or a Democrat. And I don't understand how people can argue that government spending does not help the economy in bad times like these, which occur once or twice a century. Government spending is obviously not a long-term solution, but it is a way to get the economy moving again.

And as far as Wall Street regulation, I'm disgusted that regulators who had any guts were squashed in the years before the financial crisis. Do you know about Brooksley Born and her campaign to regulate the derivatives market?

The free market policies of Alan Greenspan were tried and failed. Greenspan himself now admits this!
agluck , July 08, 2010
Recovery.gov is the government's web site. I don't expect the government to say it flushed the money down the toilet.
mrowland , July 08, 2010
Thanks for the detailed response. I don't read Beck, so I'm not aware of his use of the comments, however if he is reading Rothbard now maybe he is worth listening to.

Taken from the site below in an article by Thomas DiLorenzo title 'The New Deal Debunked' is agreement of mainstream economists that WWII spending did not end the Depression, some measures of restraint and capitalism did. The Austrians have published several pieces on this viewable at Mises.org. They also have written extensively on the business cycle, and why prior to the unprecidented inverventionism of Hoover / FDR we did not have Great Depressions, notably the recession of the early 20s which in many ways could have been great.

BTW - Greenspan, and free market? Really? What about manipulating interest rates is free market? Ron Paul, a true free market thinker, has been battling Greenspan for decades.

"This last conclusion—that the abandonment of FDR's policies "coincided" with the recovery of the 1940s is very well documented by another author who is also ignored by Cole and Ohanian, Robert Higgs. In "Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War" (Independent Review, Spring 1997), Higgs showed that it was the relative neutering of New Deal policies, along with a reduction (in absolute dollars) of the federal budget from $98.4 billion in 1945 to $33 billion in 1948, that brought forth the economic recovery. Private-sector production increased by almost one-third in 1946 alone, as private capital investment increased for the first time in eighteen years.

In short, it was capitalism that finally ended the Great Depression, not FDR's hair-brained cartel, wage-increasing, unionizing, and welfare state expanding policies. It's good to see that the Journal of Political Economy, the University of Chicago, and UCLA are finally beginning to catch up to the libertarian scholarship of Richard Vedder, Lowell Gallaway, Robert Higgs, Jim Powell (author of FDR's Folly) and such predecessors of theirs as Henry Hazlitt, John T. Flynn, Murray Rothbard, F.A. Hayek, William H. Hutt, Benjamin Anderson, and others associated with the Austrian School."
rschmansky , July 08, 2010
Andy - you're clearly far left of center in your economic thinking, and in your occupation that will take you places.

But the time and energy it would take to straighten out your flawed and emotionally charged thinking would be immense. You obviously want people to comment, but you really leave very little for anyone to say since the starting point is so far off the mark.

In my opinion - you're economically confused by your political ideology. It's called politcal economics - goodluck making money with that.
codes , July 10, 2010
I am not far left! It's crazy to be pigeonholed like that!

And I am not at all politically minded. Politics bores me.

In this case, however, I think history is on Krugman's side.

It's a shame that whenever you have an opinion these days, people try to classify you.

And while you're rigfht, I do indeed like it when people leave comments on A4A, I am not writing anything to be controversial.

I've been writing in newspaper and magazines for 30 years and no one has ever called me far left before. No one!

And if you've read my columns in the trade pubs for the past 14 years, then you would know I am apolitical.

I'm actually much more comfortable avoiding political issues like this and just doing straight reporting. In this instance, however, Krugman's interview with Charlie Rose really stirred me.

But I do appreciate your comments. I'm glad you care enough about what I think to read what I write and speak up. Thanks!

agluck , July 10, 2010
For you to continue to state that history backs up your perspctive is utter nonsense. It clearly does not - in reality it does the exact opposite of what you state.

Don't know what your background is but certainly hope for your sake it's not economics.

Krugman is your man - Ok - his powers of prediction stink - and have for years. He's a far left socialist - his macro eco philosphy is nothing more than a reflection of that - yes - he did some fine micro work but in the macro sense he's a loon, and always has been.

codes , July 11, 2010
Paul Krugman, Martin Wolf and the other big spenders are remarkably resilient. On their advice, the world’s governments put up as much as 4 years’ worth of the entire planet’s savings to bring about a ‘recovery.’ On the evidence of the last couple of weeks, it didn’t work.

In the world’s leading economy, 8 million jobs have been lost. The US government disappeared almost a million jobseekers from the unemployment lists in the last two months to try to make the numbers look better.

Still, fewer people have jobs now than when the stimulus began. Those workers with jobs earn less than they did then. And those who lose their jobs wait longer than ever to find a new one.

Housing is sinking again, too, with nearly half of all the mortgaged houses already worth less than their mortgages. People are being laid off wholesale in numerous parts of the country.

But instead of falling on their swords in shame, the economists behind the stimulus efforts are positioning themselves for an ‘I told you so,’ moment.

Krugman was quick to distance himself from the G20: “as I and others have been arguing at length, penny-pinching in the midst of a severely depressed economy is no way to deal with our long-run budget problems. And penny-pinching at the expense of the unemployed is cruel as well as misguided.”
‘Spend now; cut later,’ is still his advice.

But with so much spending…and so little to show for it…you’d think he’d be shy about proposing more. At least, he might feel the burden of proof more heavily upon his shoulders. Is there any evidence that increased government spending – even in time of private sector retrenching – makes people better off?

And even if ‘spend now, cut later’ were good advice, is there any evidence that they can actually do it? None that we know of.

Based on the experience of the ’80s and ’90s, we observed last week that it didn’t seem to matter what governments did or what they said…the markets went about their business.

take a look back at the penultimate budget of the Clinton years:
“Eight years ago, our future was at risk,” Bill Clinton congratulated himself on Sept. 27, 2000. “Economic growth was low, unemployment was high, interest rates were high, the federal debt had quadrupled in the previous 12 years. When Vice President Gore and I took office, the budget deficit was $290 billion, and it was projected this year the budget deficit would be $455 billion.”

The Clinton team claimed to have turned things around. They claimed credit for a budget surplus of $122 billion. This was the third surplus in a quartet…the only surpluses in US budget history after 1972. That year may be significant.

in the ’90s, a remarkable thing happened. Practically the entire developed world began running fiscal surpluses. The US. Canada. Sweden. Finland. Europe. The entire OECD. From deficits of about 1% of GDP, budgets improved, with surpluses of about 2% by the end of the ’90s. This seemed to prove that civilized men and women, even in the time of paper money, can get control of their budgets. We already knew they could ‘spend now.’ It was beginning to look like they could ‘cut later’ too.

In June 2000, Clinton administration economists predicted that the surpluses would keep coming, rising to as much as $1 trillion over the next 10 years. But the US economy seems to have gone from Heaven to Hell in less than a decade. The race that turned deficits into surpluses lost its magic touch within 18 months. By 2002 deficits were back. And they were staggering, nearly $3 trillion worth of deficits in 2009 and 2010 alone.

The economists completely misunderstood what was going on. The triumph they celebrated was not in themselves but in their stars. They had just been lucky. Bill Clinton’s administration had kept up spending just as the Reagan team had before them, from $1.4 trillion in ’94 to $1.8 trillion in 2001. But interest rates fell. Credit grew. And the economy boomed.

The Clinton era boom is now the Obama era bust. When the contraction hit, the feds followed the formula. They mustered their fiscal and monetary stimulus. But they got no recovery. Spending more now won’t help. Not because the Obama team is less competent than the Clinton crowd. They are just unluckier. Credit is contracting.

So Krugman will be proven right after all after all. Austerity will not bring prosperity. But then, neither would stimulus. Krugman will say ‘I told you so’…and spend the rest of his career in darkness and confirmed delusion.
codes , July 11, 2010
History is not on your side Andrew - not even close

"It is incumbent on every generation to pay its own debts as it goes. A principle which if acted on would save one-half the wars of the world." -Thomas Jefferson

"Democracy will cease to exist when you take away from those who are willing to work and give to those who would not." - Thomas Jefferson

"I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them." - Thomas Jefferson

"My reading of history convinces me that most bad government results from too much government." - Thomas Jefferson

"To compel a man to subsidize with his taxes the propagation of ideas which he disbelieves and abhors is sinful and tyrannical." – Thomas Jefferson

Now this junk was penned by the guy who wrote a little document that apparently an awful lot of people would like to get an opportunity to edit.

Andrew - your appraoch threatens everything - and your old enough to know better. If you want crushing socialism then go to Greece or France. It's very nice there...

codes , July 11, 2010
I am a "liberal" and am also very fiscally conservative. We dug a very deep hole for the past 30 years by living above our means (as individuals, corporations, and governments). This must be addressed, but can't be fixed in the short term. This is the crux of the new normal. We need to survive (by stimulus,etc.), then slowly address our problems (deficit reduction), which will mean a slow economy, and some choices between guns and butter in our future. Goering and Goebels favored guns. I will take the side of butter.
teds719 , July 12, 2010
Agree with Andy, no need to stereotype nor name-call. Reasonable minds--all of yours--can disagree. And it's virtually impossible to definitively answer the question about the worth of these stimulus programs/dollars.

That said, the fact is that government spending has skyrocketed in the past two years. And we really don't seem to have much to show for it in terms of lower unemployment, etc.
skips303 , July 12, 2010
Agreed on name calling. This topic is clearly one we need to discuss with clients and they are expecting more from us than status quo. Inflationary economics hasn't worked and there aren't examples that can be shown. Non-inflationists not only have the historic results of intervention, but their best examples are often ignored in potential disasters that were avoided.

Great video on why Niall Ferguson doesn't believe history agrees with Krugman up on yahoo yesterday. Also, great videos from Murray Rothbard put up on youtube in the last few days that discuss the historic problems of economists and historians not being good at each others discipline - which causes huge issues when quoting economists, or historians. There's only a handful I think are worthwhile, Ferguson, Rothbard, Thomas Woods.
rschmansky , July 13, 2010
The first stimulus has not created any new permanent jobs that I can tell, and Census jobs seem to be what's bumping the jobs data. The (government paid) cost of jobs is not feasible to create the kind of employment we need - Biden says 10% unemployment is here to stay. So let's throw good money after bad? NO.

The bailout only helped Wall St and the Bankers and apparently certain minority groups. I don't know a single person on Main Street who was helped.

Private sector creates jobs at a much smaller cost when not hindered by onerous government. Big government never works in the long run. We don't need to be like Europe - or maybe we do - they know that spending Trillions isn't the answer. Why do we think we're different?

The problem with Socialism is that you eventually run out of other people's money to spend. Let the libs give their own money away, not mine.
vguettlein , July 13, 2010
What we are experiencing now is the result of a 40-50 year buildup of debt that started in the 1960s, and there is going to be no magical cure. Just look at where we are now after 3 stimuli involving massive government spending, significant tax rebates and record-low interest rates.

One can argue things might be much worse—Hank Paulson implied without the detested TARP unemployment could have reached 20%— but we'll never know.

The reason that the economy is recovering so slowly is that de-leveraging takes time. While I think a double-dip recession is unlikely, recessions borne out of financial crises and excessive leverage can't be cured overnight
evan , July 13, 2010
Check out PIMCO's Paul McCulley on this topic:


stvnrsmth , July 15, 2010
I spent the last few days speaking with some of the leading advisors in the country about what's next for the economy and how they're positioning their portfolios. The story will be published in two weeks at www.fa-mag.com.

Having spent time speaking with six advisors who are respected leaders in the profession with very sucessful practices, I feel more confident about this blog post, despite some of the heated opinions that have followed.

Most of the advisors I interviewed are Republicans and fiscal conservatives. Most are unsure about whether austerity or stimulus is the best solution, and almost all of them are more worried about the economy then ever before in their long careers.

agluck , July 15, 2010
Starting with an economics degree, then moving to equity trader, then going to a top trust division, then spending almost a decade at one of the top branch offices of a large wirehouse, and then going independent a decade ago. My experience tells me that there are very few in the advisory community that truly grasp economics and the intricacies of the markets.

No offense to the advisory community but the top advisors (asset gatherers) aren't likely the BEST place to look for for economic and market forcasting.
Kind of like going to the top salespeople in the car business and asking them for an engineering opinion on a crossroads decision for next years model. Although, I'm absolutely certain you received an earful of opinions.

The economics and market forecasting communities just may be a better source.
codes , July 19, 2010

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