1.07.2009

Krugman crunches numbers, has another bad dream

Economist Paul Krugman began a recent New York Times article by expressing his suspicion about the Obama stimulus:

Bit by bit we're getting information on the Obama stimulus plan, enough to start making back-of-the-envelope estimates of impact. The bottom line is this: we're probably looking at a plan that will shave less than 2 percentage points off the average unemployment rate for the next two years, and possibly quite a lot less. This raises real concerns about whether the incoming administration is lowballing its plans in an attempt to get bipartisan consensus.

He then did his arithmetic while relying on assumptions favorable to the Obama stimulus plan as it is known today. From the math and these assumptions Krugman inferred that the Obama plan will not significantly reduce unemployment. He then concluded with what may be considered his latest nightmare, although it is not that different than his last bad dream:

I see the following scenario: a weak stimulus plan, perhaps even weaker than what we're talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says "See, government spending doesn't work."

However, as Yves Smith of Naked Capitalism points out, Obama seems to be aware of the problem with his first stimulus program, his awareness being indicated as well as explained by his more recent claim that the United States will generate trillion dollar deficits for years to come (see this, this, this, this).

What this specific rejoinder misses is the President-elect's willingness to appease the Republicans, who ought to be reeling from the disasters created by their Party, their most recent Presidential regime and the McCain campaign last fall. Given the bellicose nature of the Republican Party and its base, along with its strident adherence to its creeds, Obama may never again have an opportunity to successfully if not efficiently push through a decisive economic program. He ought to take advantage of it when he can and he certainly should refuse to corrupt the program to mollify the competition.

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