1 Boring Old Man

Man, this is better than a new video game!

^{But Mr. Obama’s prescription doesn’t live up to his diagnosis…}

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

^{Is the plan being limited by fear of debt?}
^{Is the plan being limited by a lack of spending opportunities?}
^{Or is the plan being limited by political caution?}

^{Whatever the explanation, the Obama plan just doesn’t look adequate to the economy’s need…and the gap between Mr. Obama’s stern economic rhetoric and his somewhat disappointing economic plan.}

^{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.}

Ideas for Obama
By PAUL KRUGMAN
January 11, 2009

^{Last week President-elect Barack Obama was asked to respond to critics who say that his stimulus plan won’t do enough to help the economy. Mr. Obama answered that he wants to hear ideas about “how to spend money efficiently and effectively to jump-start the economy.”}

^{O.K., I’ll bite — although as I’ll explain shortly, the “jump-start” metaphor is part of the problem. First, Mr. Obama should scrap his proposal for $150 billion in business tax cuts, which would do little to help the economy. Ideally he’d scrap the proposed $150 billion payroll tax cut as well, though I’m aware that it was a campaign promise. Money not squandered on ineffective tax cuts could be used to provide further relief to Americans in distress — enhanced unemployment benefits, expanded Medicaid and more. And why not get an early start on the insurance subsidies — probably running at $100 billion or more per year — that will be essential if we’re going to achieve universal health care?}

^{Mainly, though, Mr. Obama needs to make his plan bigger. To see why, consider a new report from his own economic team. On Saturday, Christina Romer, the future head of the Council of Economic Advisers, and Jared Bernstein, who will be the vice president’s chief economist, released estimates of what the Obama economic plan would accomplish. Their report is reasonable and intellectually honest, which is a welcome change from the fuzzy math of the last eight years. But the report also makes it clear that the plan falls well short of what the economy needs.}

^{According to Ms. Romer and Mr. Bernstein, the Obama plan would have its maximum impact in the fourth quarter of 2010. Without the plan, they project, the unemployment rate in that quarter would be a disastrous 8.8 percent. Yet even with the plan, unemployment would be 7 percent — roughly as high as it is now. After 2010, the report says, the effects of the economic plan would rapidly fade away. The job of promoting full recovery would, however, remain undone: the unemployment rate would still be a painful 6.3 percent in the last quarter of 2011.}

^{Now, economic forecasting is an inexact science, to say the least, and things could turn out better than the report predicts. But they could also turn out worse. The report itself acknowledges that “some private forecasters anticipate unemployment rates as high as 11 percent in the absence of action.” And I’m with Lawrence Summers, another member of the Obama economic team, who recently declared, “In this crisis, doing too little poses a greater threat than doing too much.” Unfortunately, that principle isn’t reflected in the current plan. So how can Mr. Obama do more? By including a lot more public investment in his plan — which will be possible if he takes a longer view.}

^{The Romer-Bernstein report acknowledges that “a dollar of infrastructure spending is more effective in creating jobs than a dollar of tax cuts.” It argues, however, that “there is a limit on how much government investment can be carried out efficiently in a short time frame.” But why does the time frame have to be short?}

^{As far as I can tell, Mr. Obama’s planners have focused on investment projects that will deliver their main jobs boost over the next two years. But since unemployment is likely to remain high well beyond that two-year window, the plan should also include longer-term investment projects. And bear in mind that even a project that delivers its main punch in, say, 2011 can provide significant economic support in earlier years. If Mr. Obama drops the “jump-start” metaphor, if he accepts the reality that we need a multi-year program rather than a short burst of activity, he can create a lot more jobs through government investment, even in the near term.}

^{Still, shouldn’t Mr. Obama wait for proof that a bigger, longer-term plan is needed? No. Right now the investment portion of the Obama plan is limited by a shortage of “shovel ready” projects, projects ready to go on short notice. A lot more investment can be under way by late 2010 or 2011 if Mr. Obama gives the go-ahead now — but if he waits too long before deciding, that window of opportunity will be gone. One more thing: even with the Obama plan, the Romer-Bernstein report predicts an average unemployment rate of 7.3 percent over the next three years. That’s a scary number, big enough to pose a real risk that the U.S. economy will get stuck in a Japan-type deflationary trap.}

^{So my advice to the Obama team is to scrap the business tax cuts, and, more important, to deal with the threat of doing too little by doing more. And the way to do more is to stop talking about jump-starts and look more broadly at the possibilities for government investment.}

But, that aside, Krugman’s response was really good. He didn’t exactly respond to Obama’s question, but he clarified his objections. He remakes the point that tax-cuts aren’t likely to help with the financial crisis. That makes sense to me. Obama knows that – he said it on This Week yesterday [less “bang for buck”]. What he’s trying to say to Obama is that to think that all that’s needed is a “jump start” is naive. This is going to take a long time, and getting out too qiickly is no good. One place to look at why Krugman says it is the Great Depression. F.D.R. came on like a Lion in 1933. But in 1937, partly in response to criticism, he backed off and started to try to pay-back prematurely. The result was another Recession that lasted until World War II. So Krugman suggests getting out of the short-term mode and start looking for ways to supply jobs down the line. Krugman is still saying “more.” While he’s not being specific, I think what he’s saying is that he might not specifically know how to solve the practicalities either, Obama is going to have to provide more jobs for a longer time than he’s currently projecting. It’s not Krugman’s job to know how to do it. As a macroeconomist, he’s doing us a great service if he lets us know what needs doing. Good job, Krugman!