1 Boring Old Man

The Obama Gap
By PAUL KRUGMAN
January 8, 2009

“I don’t believe it’s too late to change course, but it will be if we don’t take dramatic action as soon as possible. If nothing is done, this recession could linger for years.”

So declared President-elect Barack Obama on Thursday, explaining why the nation needs an extremely aggressive government response to the economic downturn. He’s right. This is the most dangerous economic crisis since the Great Depression, and it could all too easily turn into a prolonged slump.

But Mr. Obama’s prescription doesn’t live up to his diagnosis. The economic plan he’s offering isn’t as strong as his language about the economic threat. In fact, it falls well short of what’s needed.The bottom line is that the Obama plan is unlikely to close more than half of the looming output gap, and could easily end up doing less than a third of the job.

…

Why isn’t Mr. Obama trying to do more?

Is the plan being limited by fear of debt? There are dangers associated with large-scale government borrowing — and this week’s C.B.O. report projected a $1.2 trillion deficit for this year. But it would be even more dangerous to fall short in rescuing the economy. The president-elect spoke eloquently and accurately on Thursday about the consequences of failing to act — there’s a real risk that we’ll slide into a prolonged, Japanese-style deflationary trap — but the consequences of failing to act adequately aren’t much better.

Is the plan being limited by a lack of spending opportunities? There are only a limited number of “shovel-ready” public investment projects — that is, projects that can be started quickly enough to help the economy in the near term. But there are other forms of public spending, especially on health care, that could do good while aiding the economy in its hour of need.

Or is the plan being limited by political caution? Press reports last month indicated that Obama aides were anxious to keep the final price tag on the plan below the politically sensitive trillion-dollar mark. There also have been suggestions that the plan’s inclusion of large business tax cuts, which add to its cost but will do little for the economy, is an attempt to win Republican votes in Congress.

Whatever the explanation, the Obama plan just doesn’t look adequate to the economy’s need. To be sure, a third of a loaf is better than none. But right now we seem to be facing two major economic gaps: the gap between the economy’s potential and its likely performance, and the gap between Mr. Obama’s stern economic rhetoric and his somewhat disappointing economic plan.

‘If Paul Krugman has a good idea…

then we’re going to do it’…

Nobel Prize-winning economist Paul Krugman has been a frequent critic of President-elect Obama. During the primary season, he faulted Obama for saying there is a Social Security “crisis,” refusing to adopt a mandate in his health care proposals, and not fighting enough on “partisan issues.” In fact, today in his New York Times column, Krugman expresses skepticism at the effectiveness of Obama’s stimulus plan, in particular his tax cuts for businesses:

But right now we seem to be facing two major economic gaps: the gap between the economy’s potential and its likely performance, and the gap between Mr. Obama’s stern economic rhetoric and his somewhat disappointing economic plan.

Today in his press conference, a reporter questioned Obama about Krugman’s criticisms. Obama said that he is open to the economist’s ideas: “If Paul Krugman has a good idea, in terms of how to spend money efficiently and effectively to jump-start the economy, then we’re going to do it.”

Last month, Krugman told radio host Bill Press that he is “in communications” with the Obama team.

CHIP REID: Thank you, Mr. President-Elect. I’d like to follow up on that. Larry Summers, as he said, is up on the Hill now, and we’re told he’s getting an earful from some Democrats who say this plan just isn’t big enough. And I know you resisted putting a number on it, but your staff has talked about a high end of $800 billion or something like that. They say if that’s true, and 40 percent of it is tax cuts that don’t have the bang for the buck, that spending has, it’s not big enough. Paul Krugman today said it falls far short for what you’re going to need to put America back to work. How do you respond to those critics?

OBAMA: Look, there’s some people who have said that it’s not big enough, there are others who say it’s too big. Well, the — as I said before, Democrats or Republicans, we welcome good ideas. And so the challenge for all of us, I think, is to identify good ideas, good spending plans, that deliver on my commitment to create or save 3 million jobs. I want this to work. This is not an intellectual exercise, and there is no pride of authorship. If members of Congress have good ideas, if they can identify a project for me that will create jobs in an efficient way, that does not hamper our ability to — over the long term — get control of our deficit, that is good for the economy, then I’m going to accept it.

If Paul Krugman has a good idea, in terms of how to spend money efficiently and effectively to jump-start the economy, then we’re going to do it. If somebody has an idea for a tax cut that is better than a tax cut we’ve proposed, we will embrace it. So, you know, one of the things that I think I’m trying to communicate in this process is for everybody to get past the habit that sometimes occurs in Washington of whose idea is it, what ideological corner does it come from. Just show me. If you can show me that something is going to work, I will welcome it.

Well. here’s a dilemma – two people who I admire a lot who are having a spat, Paul Krugman and Barack Obama. I like both of them for the same reasons. They’re both honest; they’re both “right-thinking”; they’re both smart. But they’re both in a bind. Krugman really thinks that this financial crisis needs an F.D.R. level response – Keynesian Economics extrordinaire. He also surely knows that Obama doesn’t need criticism from liberals right now. Obama’s bind is that he needs to have a package that gets through Congress [Republicans and fiscal moderate Democrats], and he needs to have a plan that works.

The only thing I’m sure of is that I don’t want him to let Bush and friends spend the rest of the bail-out. Other than that, I worry about the tax-cuts being part of the stimulus package too. It puts money in people’s pockets, but I expect that’s where it will stay. I’d rather allocate that money to job creation. So I worry that Obama is on the soft side. On the other hand, I don’t think throwing money at things is a very hot idea either – look at the bail-out. We’re going to have to pay it back sometime. So I agree with Krugman that I’d like to see a bit more vigor, but I respect Obama’s caution.

On the Krugman side, as much as I like him, he’s a real liberal. In the recent past, it caused him to make an error in my opinion. In May, he wrote a column, The Oil Non-Bubble, in which he said that the escalating gas prices did not represent a “financial bubble.” He pointed to the dwindling oil supply in the world [supply and demand]. We needed to tighten our belts and get on board the move to drive less and cut our oil habit. He was right about dwindling oil reserves and exactly right about what we ought to do. But, that’s the way financial bubbles work – there’s a believable reason that some market is shooting through the roof that hides the underlying speculation. So, even though everything Krugman said was correct, the escalation of the oil prices was a financial bubble that “burst” in June, only a month after Krugman’s article. So, he’s not infallible. If I were he, I would think my beliefs about the rightness of addressing the oil dependance and global warming, strong liberal values I personally agree with, got in the way of the economics. Speculators took advantage of the rightness of that argument, and had a field day in the oil futures market creating a destructive bubble. To my reading, the bursting of the oil bubble was the “straw that broke the camel’s back,” and the whole Market followed it down the slope in only a few months. So it wasn’t just a bubble, but it was also a bubble:

If Paul Krugman has a good idea in terms of how to spend money efficiently and effectively to jump-start the economy, then we’re going to do it. If somebody has an idea for a tax cut that is better than a tax cut we’ve proposed, we will embrace it. So, you know, one of the things that I think I’m trying to communicate in this process is for everybody to get past the habit that sometimes occurs in Washington of whose idea is it, what ideological corner does it come from. Just show me. If you can show me that something is going to work, I will welcome it.