Facepalm: "It would be easier to go back for more stimulus..."
The 12/08 Larry Summers memo (re: best size and design of stimulus package) that Ryan Lizza made public is not surprising, but is epic-fail nonetheless.
http://www.newyorker.com/online/blogs/newsdesk/2012/01/the-summers-memo.html
First, fiscal stimulus sufficient to fill the pending output gap would not fill the output gap because it would "spook the markets" (page 11) making the economy even worse. That was hopelessly stupid analysis. The idea was that anything much over 600 billion of government borrowing would drive up interest rates enough to strangle the recovery. There was never any evidence of that and an ocean of evidence of the contrary but there are things the serious people just "know." Bonus clueless points for the fear that a stimulus over $600 billion was "excessive" because it could "spook... the public." WTF? Presumably the citizenry responds to public spending by cutting back private spending because the public sector knows they have to budget for future tax increases to cover the government spending. This is a common argument in RW circles that was highly debatable in the 1990s and is utterly fricking delusional in the context of the economic collapse of 2008. The private sector stopped spending and stopped borrowing. The federal government was the spender and borrower of last resort. The idea that a robust stimulus plan would make people spend even less out of concern about the deficit is just f'ing bizarre in the context of a broad private-balance-sheet demand crisis.
I know plenty of people who don't eat out because they are unemployed. I do not know anyone who eats rammen noodles because they are setting aside money to cover the eventual cost of the 2009 stimulus package.
Second, and much worse, is the argument (page 12) that it is better to go small with stimulus because it is hard to cut back if it is too big, but if it is too small you can always go back for more.
"It is easier to add down the road to insufficient fiscal stimulus than to subtract from excessive fiscal stimulus."
Face palm. Sad to say, it was the incoming economic team, not its critics on the left, that had a delusional and non-pragmatic view of political reality.
Paul Krugman
...The key thing I took away from the memo is that it does not read at all like the current story the administration gives for the inadequate size of the stimulus, which is that they knew it should be larger but had to face political reality.
Instead, the memo argues that a bigger stimulus would be counterproductive in economic terms, because of the “market reaction”. That is, Summers et al were afraid of the invisible bond vigilantes.
And to the extent that there is a political judgment, it’s all in the opposite direction: if the stimulus is too big, we’ll have trouble scaling it back, but if it’s too small, we can always go back to Congress for more. That was deeply naive — and I said so in real time.
Now, you can still argue that politics made a bigger stimulus impossible. But that’s not at all the argument being made internally within the administration at the time...
http://krugman.blogs.nytimes.com/2012/01/23/larry-and-the-invisibles/
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