Paul Krugman responds . . .
The Stimulus Tragedy
FEB. 20, 2014
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Continue reading the main story
Continue reading the main story
Five years have passed since President Obama signed the American Recovery and Reinvestment Act — the “stimulus” — into law. With the passage of time, it has become clear that the act did a vast amount of good. It helped end the economy’s plunge; it created or saved millions of jobs; it left behind an important legacy of public and private investment.
It was also a political disaster. And the consequences of that political disaster — the perception that stimulus failed — have haunted economic policy ever since.
Let’s start with the good the stimulus did.
The case for stimulus was that we were suffering from a huge shortfall in overall spending, and that the hit to the economy from the financial crisis and the bursting of the housing bubble was so severe that the Federal Reserve, which normally fights recessions by cutting short-term interest rates, couldn’t overcome this slump on its own. The idea, then, was to provide a temporary boost both by having the government directly spend more and by using tax cuts and public aid to boost family incomes, inducing more private spending.
Opponents of stimulus argued vociferously that deficit spending would send interest rates skyrocketing,“crowding out” private spending. Proponents responded, however, that crowding out — a real issue when the economy is near full employment — wouldn’t happen in a deeply depressed economy, awash in excess capacity and excess savings. And stimulus supporters were right: far from soaring, interest rates fell to historic lows.
What about positive evidence for the benefits of stimulus? That’s trickier, because it’s hard to disentangle the effects of the Recovery Act from all the other things that were going on at the time. Nonetheless, most careful studies have found evidence of strong positive effects on employment and output.
Even more important, I’d argue, is the huge natural experiment Europe has provided on the effects of sharp changes in government spending. You see, some but not all members of the euro area, the group of countries sharing Europe’s common currency, were forced into imposing draconian fiscal austerity, that is, negative stimulus. If stimulus opponents had been right about the way the world works, these austerity programs wouldn’t have had severe adverse economic effects, because cuts in government spending would have been offset by rising private spending. In fact, austerity led to nasty, in some cases catastrophic, declines in output and employment. And private spending in countries imposing harsh austerity ended up falling instead of rising, amplifying the direct effects of government cutbacks.
All the evidence, then, points to substantial positive short-run effects from the Obama stimulus. And there were surely long-term benefits, too: big investments in everything from green energy to electronic medical records.
So why does everyone — or, to be more accurate, everyone except those who have seriously studied the issue — believe that the stimulus was a failure? Because the U.S. economy continued to perform poorly — not disastrously, but poorly — after the stimulus went into effect.
There’s no mystery about why: America was coping with the legacy of a giant housing bubble. Even now, housing has only partly recovered, while consumers are still held back by the huge debts they ran up during the bubble years. And the stimulus was both too small and too short-lived to overcome that dire legacy.
This is not, by the way, a case of making excuses after the fact. Regular readers know that I was more or less tearing my hair out in early 2009, warning that the Recovery Act was inadequate — and that by falling short, the act would end up discrediting the very idea of stimulus. And so it proved.
There’s a long-running debate over whether the Obama administration could have gotten more. The administration compounded the damage with excessively optimistic forecasts, based on the false premise that the economy would quickly bounce back once confidence in the financial system was restored.
But that’s all water under the bridge. The important point is that U.S. fiscal policy went completely in the wrong direction after 2010. With the stimulus perceived as a failure, job creation almost disappeared from inside-the-Beltway discourse, replaced with obsessive concern over budget deficits. Government spending, which had been temporarily boosted both by the Recovery Act and by safety-net programs like food stamps and unemployment benefits, began falling, with public investment hit worst. And this anti-stimulus has destroyed millions of jobs.
In other words, the overall narrative of the stimulus is tragic. A policy initiative that was good but not good enough ended up being seen as a failure, and set the stage for an immensely destructive wrong turn.
A version of this op-ed appears in print on February 21, 2014, on page A25 of the New York edition with the headline: The Stimulus Tragedy. Order Reprints|Today's Paper|Subscribe
<nyt_headline version="1.0" type=" " style="font-size: 12px; background-color: rgba(255, 255, 255, 0);">Nobody Understands Debt
By PAUL KRUGMAN
Published: January 1, 2012 712 Comments
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In 2011, as in 2010, America was in a technical recovery but continued to suffer from disastrously high unemployment. And through most of 2011, as in 2010, almost all the conversation in Washington was about something else: the allegedly urgent issue of reducing the budget deficit.
Fred R. Conrad/The New York Times
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This misplaced focus said a lot about our political culture, in particular about how disconnected Congress is from the suffering of ordinary Americans. But it also revealed something else: when people in D.C. talk about deficits and debt, by and large they have no idea what they’re talking about — and the people who talk the most understand the least.
Perhaps most obviously, the economic “experts” on whom much of Congress relies have been repeatedly, utterly wrong about the short-run effects of budget deficits. People who get their economic analysis from the likes of the Heritage Foundation have been waiting ever since President Obama took office for budget deficits to send interest rates soaring. Any day now!
And while they’ve been waiting, those rates have dropped to historical lows. You might think that this would make politicians question their choice of experts — that is, you might think that if you didn’t know anything about our postmodern, fact-free politics.
But Washington isn’t just confused about the short run; it’s also confused about the long run. For while debt can be a problem, the way our politicians and pundits think about debt is all wrong, and exaggerates the problem’s size.
Deficit-worriers portray a future in which we’re impoverished by the need to pay back money we’ve been borrowing. They see America as being like a family that took out too large a mortgage, and will have a hard time making the monthly payments.
This is, however, a really bad analogy in at least two ways.
First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation.
Second — and this is the point almost nobody seems to get — an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves.
This was clearly true of the debt incurred to win World War II. Taxpayers were on the hook for a debt that was significantly bigger, as a percentage of G.D.P., than debt today; but that debt was also owned by taxpayers, such as all the people who bought savings bonds. So the debt didn’t make postwar America poorer. In particular, the debt didn’t prevent the postwar generation from experiencing the biggest rise in incomes and living standards in our nation’s history.
But isn’t this time different? Not as much as you think.
It’s true that foreigners now hold large claims on the United States, including a fair amount of government debt. But every dollar’s worth of foreign claims on America is matched by 89 cents’ worth of U.S. claims on foreigners. And because foreigners tend to put their U.S. investments into safe, low-yield assets, America actually earns morefrom its assets abroad than it pays to foreign investors. If your image is of a nation that’s already deep in hock to the Chinese, you’ve been misinformed. Nor are we heading rapidly in that direction.
Now, the fact that federal debt isn’t at all like a mortgage on America’s future doesn’t mean that the debt is harmless. Taxes must be levied to pay the interest, and you don’t have to be a right-wing ideologue to concede that taxes impose some cost on the economy, if nothing else by causing a diversion of resources away from productive activities into tax avoidance and evasion. But these costs are a lot less dramatic than the analogy with an overindebted family might suggest.
And that’s why nations with stable, responsible governments — that is, governments that are willing to impose modestly higher taxes when the situation warrants it — have historically been able to live with much higher levels of debt than today’s conventional wisdom would lead you to believe. Britain, in particular, has had debt exceeding 100 percent of G.D.P. for 81 of the last 170 years. When Keynes was writing about the need to spend your way out of a depression, Britain was deeper in debt than any advanced nation today, with the exception of Japan.
Of course, America, with its rabidly antitax conservative movement, may not have a government that is responsible in this sense. But in that case the fault lies not in our debt, but in ourselves.
So yes, debt matters. But right now, other things matter more. We need more, not less, government spending to get us out of our unemployment trap. And the wrongheaded, ill-informed obsession with debt is standing in the way.