Paul Krugman: The Stimulus Trap

Everybody makes mistakes. But not everyone can admit their mistakes, and then take the steps needed to overcome them:

The Stimulus Trap, by Paul Krugman, Commentary, NY Times: As soon as the Obama administration-in-waiting announced its stimulus plan — this was before Inauguration Day — some of us worried that the plan would prove inadequate. …

The bad employment report for June made it clear that the stimulus was, indeed, too small. But it also damaged the credibility of the administration’s economic stewardship. There’s now a real risk that President Obama will find himself caught in a political-economic trap.

I’ll talk about that trap, and how he can escape it, in a moment. First, however, let me … ask how concerned citizens should be reacting to the disappointing economic news. Should we be patient, and give the Obama plan time to work? Should we call for bigger, bolder actions? Or should we declare the plan a failure and demand that the administration call the whole thing off? …

When there’s an ordinary, garden-variety recession, the job of fighting that recession is assigned to the Federal Reserve. … Reducing rates a bit at a time, it keeps cutting until the economy turns around. At times it pauses to assess the effects of its work; if the economy is still weak, the cutting resumes. …

Normally, then, we expect policy makers to respond to bad job numbers with a combination of patience and resolve. They should give existing policies time to work, but they should also consider making those policies stronger.

And that’s what the Obama administration should be doing…, stay calm in the face of disappointing early results,… the plan will take time to deliver its full benefit. But … be prepared to add to the stimulus now that it’s clear that the first round wasn’t big enough.

Unfortunately, the politics of fiscal policy are very different from the politics of monetary policy. For the past 30 years, we’ve been told that government spending is bad, and conservative opposition to fiscal stimulus (which might make people think better of government) has been bitter and unrelenting even in the face of the worst slump since the Great Depression. Predictably, then, Republicans — and some Democrats — have treated any bad news as evidence of failure, rather than as a reason to make the policy stronger.

Hence the danger that the Obama administration will find itself caught in a political-economic trap, in which the very weakness of the economy undermines the administration’s ability to respond effectively. … The question is what the president and his economic team should do now.

It’s perfectly O.K. for the administration to defend what it’s done so far. … It’s also reasonable for administration economists to call for patience…

But there’s a difference between defending what you’ve done so far and being defensive. It was disturbing when President Obama walked back Mr. Biden’s admission that the administration “misread” the economy, declaring that “there’s nothing we would have done differently.” There was a whiff of the Bush infallibility complex in that remark, a hint that the current administration might share some of its predecessor’s inability to admit mistakes. And that’s an attitude neither Mr. Obama nor the country can afford.

What Mr. Obama needs to do is level with the American people. He needs to admit that he may not have done enough on the first try. He needs to remind the country that he’s trying to steer the country through a severe economic storm, and that some course adjustments — including, quite possibly, another round of stimulus — may be necessary.

What he needs, in short, is to do for economic policy what he’s already done for race relations and foreign policy — talk to Americans like adults.

Originally published at Economist’s View and reproduced here with the author’s permission.

One Response to "Paul Krugman: The Stimulus Trap"

  1. Anonymous   July 17, 2009 at 11:10 am

    “What he needs, in short, is to do for economic policy what he’s already done for race relations and foreign policy — talk to Americans like adults.”So right he is, but add an additional factor: That giant sucking sound is the decline in free energy available to support our middle class. Fifty years ago U.S. oil production cost one barrel of energy for each 100 barrels extracted. Now, an increasing amount of energy is required to extract our difficult to find and recover oil – – deepwater, polar, heavy oil, and oil sands. This ratio of “Energy Returned on Energy Invested” (EROEI) has been falling falling for years, leaving less energy available for society to use. (The same concept applies, so far to a lesser extent, to coal, gas & nuclear.)So we should really be asking how a new economy will begin, rather than a business-as-usual recovery. Obama will not get us there as long as he and his science advisors pretend not to know — and talk honestly to us like Carter did — about Peak Oil and falling EROEI. We need to save energy in a hurry through conservation and efficiency measures in order to buy the time to transition to less energy-intensive life styles using less carbon-intensive fuels.