New York Times columnist and Nobel Prize-winning economist Paul Krugman knows the situation facing the United States is very serious, so he doesn't mince words.
columnist and Nobel Prize-winning economist knows the situation facing the United States is very serious, so he doesn't mince words.Krugman outlined: The housing sector has collapsed. Consumers have sharply decreased their spending, due to a declining stock market, home prices, and stagnant wages. Businesses are cutting investment. Exports, the formerly one strength of the economy, are plunging, as the recession grips emerging markets. The Fed has already cut short-term interest rates to zero. And there are signs of deflation. In sum, the U.S. economy is very close to the dreaded negative spiral that tends to feed on itself, and that could continue for a long, long time without fiscal stimulus.
Hence, the nation needs to pass the fiscal stimulus package, and if anything, the current package is too small, he argued.
Further, efforts by economic conservatives and market absolutists, led by Congressional Republicans, to make the stimulus small via cutting spending, will hurt the economy substantially, Krugman said: they represent, by and large, an attempt to turn it into another round of Bush-style tax cuts that did not lead to sustainable GDP growth and robust job growth in the first place.
The problem: Lack of demand
Economist Richard Felson adds that (and this is something Krugman has noted in previously, as well) the upper-income-favoring tax cuts earlier this decade, combined with an increase in defense spending for the Iraq War, also opened a large budget deficit -- one that totaled $400 billion before bank bailout spending in the past six months. In other words, in addition to not leading to sustainable economic growth, the tax cuts ruined the essentially balanced budget of the Clinton era. The United States went from a roughly $5 trillion national debt in 2000 that was being paid off, to a more than $11 trillion national debt in 2008 that is trending higher, he said. The economic policies of the previous administration created the un-solid fiscal condition of running a large deficit while the U.S. economy was growing, he added.
What's more, there's no guarantee that tax cuts now will increase GDP. "Taxes cut now will give the economy some boost, but the dollars also could be saved by investors, so what's really needed now is a large amount of spending to make up for the up to $2 trillion in lost output/GDP due to the recession," Felson said.
If a large stimulus package is not passed, Felson said, "the U.S. economy will have a lack of demand, will remain in recession for a long time, and the recession will deepen. It's sheer idiocy not to provide large fiscal stimulus now, and more later this year in the range of $400-$600 billion, if needed. If you don't provide large stimulus now you're essentially setting yourself up for bigger problems later, with even worse social problems, and even larger economic reforms later."
Fiscal Policy/Economic Analysis: The views of economist Krugman and Felson represent the view from here, as well. The United States is facing its most serious economic recession since World War II. It is a national economic emergency. The nation has lost more than 3 million jobs since the recession's start. Every economic indicator points to falling demand, and we're close to deflation. Hence, the classic supply side, economic conservative response of tax cuts and federal spending reductions will not work. In fact, if Congress did exactly as what some Republicans advocate -- cut federal spending now -- an economic calamity, the likes of which very few people alive today have seen, would ensue. Further, fiscal stimulus that's too small still risks a long, pronounced recession: as John Maynard Keynes has demonstrated, recessions don't necessarily go away by themselves, which only adds to the argument to prime-the-pump with a large fiscal stimulus package to generate demand.
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Reader Comments (Page 1 of 1)
2-08-2009 @ 11:08AM
JCH said...
First, people need to get off this fear of inflation and deflation. It's how the economy adjusts. Neither is evil or bad. What is bad is having an insane fear of them. They both can do beneficial things for the economy.
If people refuse to spend their money, and the government is going to be the spender of last resort, then tax rates should be topping out at over 70%.
That's the American way. It's how we won WW2. Whatever the government didn't take with their high tax rates (topping at over 90%), was poured into government war bonds (patriotic savings).
2-08-2009 @ 11:47AM
Chris said...
Do states know something we don't? http://tinyurl.com/aw6gkx
2-08-2009 @ 3:14PM
TEXAN said...
This is just more of the democrat activist Paul Krugmann posting rants to support the liberal wasteful spending bill. He has no more credibility than anyone else, he is merely a theoretic academic economist...not a producer of goods and services nor a sociologist. He attempts to fog everyone with a Nobel prize credential. So what, so does AL GORE, AND JIMMY CARTER AND YASSER ARAFAT.
The economy will not recover from the consumer until they trust the government and administration, and this bunch are absolutely doing nothing but trying to fog over the fact and scare people into supporing an unsupportable pork filled piece of partisan junk. Funny how all the people that could see so clearly how "Bush lied about WMD in waging war against Iraq" are so stupidly blind in this trash and shameful abuse of power and control by the congress and the greenhorn president. If the New York Times and Paul Krugmann favor it, and if Nancy Pelosi and Harry Reid have their name on it....you can bet your bottom dollar that it is filled with stink and lies.
2-08-2009 @ 3:29PM
Terry Mock said...
Humbled Masters of the Universe
Why do we continue to look to the same people who got us into this mess for answers?
Founded in 1971, the World Economic Forum meets annually in Davos, Switzerland to bring together top business and political leaders as well as intellectuals, economists, journalists, and others. Its recent 2009 meeting attracted over 2500 participants from 91 countries, including over 1170 CEOs and chairpersons from the world’s most powerful companies.
This year’s official Davos theme - “Shaping the Post-Crisis World” – might well have been – “How could the giants of capitalism have been so stupid?” For many, Davos this year was “where the pent-up dismay and anger over what Wall Street wrought boiled to the surface” despite efforts to contain it. The rock stars here this year, surrounded by adoring fans, were two economic analysts, Nouriel Roubini and Nassim Nicholas Taleb, who saw the disaster coming before most everyone else, as documented in this column previously. Implying but not naming America, China’s Wen Jiabao said the financial crisis was “attributable to inappropriate macroeconomic policies of some economies and their unsustainable model of development characterized by prolonged low savings and high consumption; excessive expansion of financial institutions in blind pursuit of profit.”
Back in the US, the news about our local leaders wasn’t any better. Time magazine profiled iconic Palm Beach County as “The New Capital of Florida Corruption” In just the past two years, four city and county commissioners have been convicted of federal corruption charges related to “pay for play” land development schemes, and a fifth could soon join the others in serving time. While in power, these public officials “alienated the general public and took a haphazard view of development — a common South Florida practice that’s indelibly tied to helping those companies and private interests that supported them.” Unfortunately, this practice is not limited to one area of the country, or one political party. According to the current Palm Beach County GOP Chairman, “I think that what everyone has realized, the general reaction is, America has a problem. We are corrupt from coast to coast and border to border.”
Back room deals and corruption, perceived and real, often inhibit progress and change. In contrast, in a transparent and public proposal offered to President Obama’s administration, SLDI has offered a public-private partnership, its Sustainable Land Development Best Practices System, and the breadth of its research and collective knowledge to combat the country’s economic woes, enhance environmental stewardship and increase social responsibility - all at the same time.
Your participation and comments are welcome.
Terry Mock
Executive Director
Sustainable Land Development International
www.SLDI.org
From SLDI February 2009 Newsletter - http://www.sldi.org/newService/SLDIFeb2009.html