If there’s one thing Obama can’t do if he is to avoid being blamed for Great Depression 2.0, it is to understate the problem. And Paul Krugman thinks he’s already doing that. Worse, Krugman thinks Obama’s stimulus package is already too small.
Yes, by the time it emerges from Congress it will have been so stuffed with pork that it will look like the Stay-Puff Marshmallow Man. But even then it might fall short.
Krugman: 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.
Bear in mind just how big the U.S. economy is. Given sufficient demand for its output, America would produce more than $30 trillion worth of goods and services over the next two years. But with both consumer spending and business investment plunging, a huge gap is opening up between what the American economy can produce and what it’s able to sell.
And the Obama plan is nowhere near big enough to fill this “output gap.”
Earlier this week, the Congressional Budget Office came out with its latest analysis of the budget and economic outlook. The budget office says that in the absence of a stimulus plan, the unemployment rate would rise above 9 per cent by early 2010, and stay high for years to come.
Grim as this projection is, by the way, it’s actually optimistic compared with some independent forecasts. Mr. Obama himself has been saying that without a stimulus plan, the unemployment rate could go into double digits.
Even the C.B.O. says, however, that “economic output over the next two years will average 6.8 per cent below its potential.” This translates into $2.1 trillion of lost production. “Our economy could fall $1 trillion short of its full capacity,” declared Mr. Obama on Thursday. Well, he was actually understating things.
To close a gap of more than $2 trillion — possibly a lot more, if the budget office projections turn out to be too optimistic — Mr. Obama offers a $775 billion plan. And that’s not enough. Keep reading >
Krugman also complains that only 60% of the $775 is public spending (the rest is tax cuts): Lots of bang, not much buck. All in, he says, the stimulus will only fill one-third of the “output gap”–the gap between the economy’s current and potential rate of production.
Krugman says Obama’s probably just terrified about floating a $1+ trillion number. If that’s the case, he’d better get over it. In three months, no one will remember George W. Bush.