It's important for the U.S. Government to return to a balanced budget when the economy returns to health, but it is critically important for Congress to approve a large fiscal stimulus to help the U.S. economy recover from the current recession, he said.
Sees danger of vicious cycle
That's because doing so will help end what Krugman argues is a vicious cycle of contraction that's beginning to play itself out in the economy. Rising unemployment will lead to further reductions in consumer spending, which will lead to further business cutbacks in production and more job cuts, which will lead to further reductions in consumer spending, contracting the economy even more, and so on. It's a destructive cycle that has to be stopped, and fiscal stimulus is part of the healing: it will get momentum headed in the constructive direction.
For those who doubt the harm that prematurely trying to balance a budget can do to the U.S. economy, Krugman offered FDR's premature attempt to balance the budget in 1937: it almost destroyed the New Deal and the economic recovery taking place in the nation at that time.
Still, there will be those investors and policy makers who raise concerns about rising inflation. Economist David H. Wang said the concern is misplaced. "The bigger risk is for deflation. Housing prices and commodity prices are falling, including a big drop in a key commodity, oil, which indicates inflation is likely to be tame," Wang said. "If companies start lowering prices at the retail level and we get deflation, the recession will deepen. Inflation is not an issue at this time, so fiscal stimulus should be the focus."
Krugman wants a large fiscal stimulus package: $600 billion. Wang agreed, saying that's the magnitude of stimulus needed to offset private sector contraction forces.
Fiscal Policy/Economic Analysis: If we can get Obama, Pelosi, Frank, Reid, and a few Republicans to agree on a $600 billion fiscal stimulus package -- or a two-part package totaling the above -- that would really be a step in the right direction.
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Reader Comments (Page 1 of 1)
11-18-2008 @ 3:16AM
MC said...
Mr. Krugman I couldn't agree with you more the bleeding of jobs is going to put our economy into what I see a depression. I say the additional stimulus package should come in 4 parts so the people of this great country can at least buy what they need. And if they spend it in a smart way they would help keep the retail industries & manufacturing industries going so that there wouldn't be anymore bleeding of jobs.I would say Jan 1st, May 1st, Sept. 1st, Jan 1st. What do you think of that? On a side note I feel in the guide lines that these companies that are getting the bailout money, that if they bleed any jobs they have to return a set amount or the amount of salary they just eliminated of money back to the bailout pool.Bleeding jobs is only going to make the economy worse where there is
less spending, and the tax bases for the county, state and federal goverment is reduced so I'd say including the amount of taxes that was just reduced by the elimination of those jobs should be returned to the bailout pool.
11-19-2008 @ 10:10AM
Milos Sugovic said...
Recessionomic consumer behavior creates superior opportunities for inferior products. It opens up doors for creative destruction in marketing, advertising and public relations. Those that are positioned to use the stratification of the market to their advantage are going to remain afloat during the current slump. Others will come out ahead. How? I discuss it at http://peppercomblog.typepad.com/
11-19-2008 @ 11:57PM
Brian Briggs said...
Krugman is absolutely correct, as he has been time after time on almost every other economic issue. He's also correct in his belief that America needs to start a massive new infrastructure program: It would not only fix the current aging infrastructure we have that's been falling apart but could put millions of Americans to work as well.
So here's an idea: Instead of giving the Big 3 another 25 billion dollar bailout, why not just split that 25 billion up between the autoworkers and use it to retrain them for work in a new field? If you crunch the numbers, each autoworker who'd be unemployed if the Big 3 don't get that bailout would get $25,000 for retraining or reeducation.
What if those those workers were also given an incentive if they agreed to be retrained in fields having to do with repairing and modernizing our aging infrastructure? Or if they agreed to be reeducated to find employment in the emerging. and vital alternative energy field?
We'd be killing two birds with one stone; It'd be a major boost toward fixing our crumbling infrastructure- one of the things P. Krugman believes is crucial in fixing our economy- and it would also help to grow the alt. energy field- another of P. Krugman's keys to fixing the economy. priorities.
It'd fit in perfectly with the major fiscal stimulus that Krugman thinks is required if we're going to fix the financial crisis; Plus it wouldn't be as if we'd be throwing away 25,000 per worker that we'd never see again. Taxpayers would make money on that 25,000 after those workers were retrained and employed again; That'd mean they'd be paying taxes once more and contributing to society instead being a drain on it by depending on Social Services.
If they aren't retrained they'll be a drain on our social services for a year, or many years, or even for life. Some ex-autoworkers will find other work, but it probably won't pay or have benefits close to those they lost. Both will cost more using the Social Services they'll need to survive than if they'd been retrained for work using the 25 billion in bailout money for the Big 3.
B Briggs
11-20-2008 @ 9:29AM
Brian said...
Give $25,000 to auto workers, that's rich. How about they pay for their own re-education since the make salaries that rival attorney's and all for driving a screw. Anyone who is making over 100K a year should have the means to get their own education. If not, why does that become the burden of the other taxpayers who have lived below their means for much less? The gov't is rewarding failure.