Krugman: The Economy Is So Not Fixed -- We Need A Second Stimulus

paulkrugman explaining tbi

Paul Krugman observes what the market noticed yesterday, which is that enthusiasm about the recovery has blown way past the reality.

Specifically, he’s worried about unemployment:

[T]he administration’s own economic projection — a projection that takes into account the extra jobs the administration says its policies will create — is that the unemployment rate, which was below 5 per cent just two years ago, will average 9.8 per cent in 2010, 8.6 per cent in 2011, and 7.7 per cent in 2012.

This should not be considered an acceptable outlook. For one thing, it implies an enormous amount of suffering over the next few years. Moreover, unemployment that remains that high, that long, will cast long shadows over America’s future.

Then there’s the “output gap,” however you define it, which Krugman puts at $2 trillion below where we could be.  (He doesn’t address the role of debt in this–a beef lots of folks have with him.  Specifically, is it fair to trend potential output upward from the peak when the peak was caused by a massive and unsustainable overload of debt?)

Krugman’s answer, as usual, is spending.  Yes, this will make the government finances look even worse.  But it’s better over the long-term, it’s better over the short-term, and it’s better than the alternative.

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