The Stimulus Trap - Krugman

[groovedaddy]

As soon as the Obama administration-in-waiting announced its stimulus plan — this was before Inauguration Day — some of us worried that the plan would prove inadequate. And we also worried that it might be hard, as a political matter, to come back for another round.

Unfortunately, those worries have proved justified. The bad employment report for June made it clear that the stimulus was, indeed, too small. But it also damaged the credibility of the administration’s economic stewardship. There’s now a real risk that President Obama will find himself caught in a political-economic trap.

I’ll talk about that trap, and how he can escape it, in a moment. First, however, let me step back and ask how concerned citizens should be reacting to the disappointing economic news. Should we be patient and give the Obama plan time to work? Should we call for bigger, bolder actions? Or should we declare the plan a failure and demand that the administration call the whole thing off?

Before you answer, consider what happens in normal times.

When there’s an ordinary, garden-variety recession, the job of fighting that recession is assigned to the Federal Reserve. The Fed responds by cutting interest rates in an incremental fashion. Reducing rates a bit at a time, it keeps cutting until the economy turns around. At times it pauses to assess the effects of its work; if the economy is still weak, the cutting resumes.

http://www.nytimes.com/2009/07/10/opinion/10krugman.html?th&emc=th

[econoclast]

1. Krugman in error

Unfortunately, the good Dr. k is wrong. There is, frankly, no way to tell whether the Stimulus is too small, too big, or just right. Why? Because 9/10ths of it hasn't happened yet! Most of the spending detailed in the Stimulus plan doesn't even START until 2010!!!

A Fed rate cut occurs more or less instantaneously and then we wait a bit to see it's impact. But the fiscal stimulus doesn't start when the bill is signed, but rather when the money starts getting spent. That hasn't hardly begun yet. And dr K should know that. We cannot evaluate it's impact yet beccause there is, for the most part, nothing to evaluate yet.

The most one can say is that the small portion of the Stimulus plan that has been implemented so far has not yet had much pact.

Remember your literature Dr K - they also serve who only stand and wait.

[FiveGoodMen]

2. Your post raises the question of whether some other kind of stimulus might have worked faster

Because we really need the improvement now.

[Better Believe It]

5. Much, much bigger and faster. Like the U.S. Conference of Mayors Proposal .....

which was ignored by Congess and the White House.

[stevebreeze]

3. Krugman in error? not so much!

read here from Dean Baker"
So, we have probably already experienced most of the boost that we will get from the stimulus. The economy would have been in worse shape without it. Consumption is higher than it would have otherwise been and state and local governments have been able to keep many programs funded that otherwise would have been cut. People have jobs (most obviously in state and local governments) who would have been unemployed in the absence of the stimulus."
link here
http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=07&year=2009&base_name=stimulus_arithmetic

[econoclast]

4. Krugman AND Dean Baker both in error

From the WSJ editorial page:
Only a small share of the spending will occur in 2009, even though Keynesians would argue that stimulus spending should be frontloaded to kick-start growth. The Congressional Budget Office estimates that the largest share of the spending will occur in 2010, with the amount in 2011 being slightly larger than in 2009.

So the CBO agrees that most of the spending doesn't take place until 2010. Hence there is not much to evaluate yet

I know it has been argued that people didn't read the plan before it was passed, but you'd think people would have read it by now.

[Better Believe It]

6. The Senate Republican written stimulus plan: Too little, too late