Krugman: Obama's Stimulus Doesn't Go Far Enough

Paul Krugman has already criticized President-elect Barack Obama for appearing to rely too much on tax cuts in his economic plan. Now he's adding a more general concern that the plan doesn't go far enough to fill the 'output gap' between what the economy can produce and what it can sell. While praising Obama's strong words in his speech Thursday, Krugman writes that "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.

...

[O]nly about 60 percent of the Obama plan consists of public spending. The rest consists of tax cuts -- and many economists are skeptical about how much these tax cuts, especially the tax breaks for business, will actually do to boost spending. (A number of Senate Democrats apparently share these doubts.) Howard Gleckman of the nonpartisan Tax Policy Center summed it up in the title of a recent blog posting: "lots of buck, not much bang."

Whatever the explanation, the Obama plan just doesn't look adequate to the economy's need. To be sure, a third of a loaf is better than none. But right now we seem to be facing two major economic gaps: the gap between the economy's potential and its likely performance, and the gap between Mr. Obama's stern economic rhetoric and his somewhat disappointing economic plan.

Top Democrats in Congress have aired similar concerns -- in particular questioning whether tax cuts will have much of an effect on the economy.

Comments

[marthlois]

Paul's ego is now getting in the way of putting "country first".
Hardly a day goes by now where I don't wake up to see his face
on HP as he criticizes another part of Obama's plan. Enough already
Paul.

[MyNameIsJames]

How are tax cuts to businesses going to stimulate consumer demand?

Furthermore, over the past 8 years, businesses and upper income individuals have experienced the most tax friendly and deregulated environment since the Great Depression. So why hasn't this "pro-growth" environment created all of the great economic expansion that the conservatives promised us?

The reality is that the multiplier effect is much larger when demand is stimulated. Conservatives are always crying inflation risk and government " crowding out" in the lending markets - With so much slack in the economy their reasoning is laughable. In reality, Supply Side Economics is just a conservative strategy for transferring wealth to the rich.

Obama is trying to be cute with this business tax cut SH**! Liberal Dems need to stick to their guns and force him to stop placating a bankrupt political party (Republicans) and their bankrupt philosophy (Conservativism) The nation is ready for a PROGRESSIVE leader on economics.

One final word on 'tax cuts" THEY are a gimmick, and a dangerous one, when we take into account their effect on our mounting national debt. NO ONE and I mean NO ONE deserves tax-cuts in this current economic environment.

In terms of the middle class tax-cut, Tax revenues from the middle class will stimulate the economy more effectively when that tax money is put into more expansive domestic growth projects - instead of being doled out as tax cuts to stimulate consumer driven spending on foreign made consumer goods.

[ema]

Right on, James.

[Yola]

Good post James but I thought a part of Obama's campaign promise was a middle class tax cut... isn't he including something he promised to the American people?

[PATina]

Yes... but $500 - $1000 dollars doled out according to your pay period... isn't going to do much stimulating. For example... I get paid twice a month or 24 times a year. Divide that $500 dollars into 24 payments and you're talking about $20 added to my check... $40 for the $1000 payment.

[PATina]

Agreed.

[jazzman]

Screw the tax cuts for business. Invest directly in projects that will bring direct jobs and spending power to the citizens of this country. Let companies bid on the projects and then hire US citizens to do the work. I promise, companies will get in line to get the contracts, tax breaks or not.

Supply side economics doesn't work. Tax cuts do not lead the rich to produce more businesses that lead to better jobs that trickle down to increasing prosperity for the American people. The ice caps will completely melt and Manhattan will be under the sea before any 'trickle down' effect will ever benefit the majority of people in this country. It's all been Republican hokem from the beginning. It's time to get real and get the economy going, growing, and flowing again.

[Mangos]

This kitchen has too many cooks!! The tax cut for businesses seems to be a spoonful of sugar for those who screamed that the package wasn't doing anything for businesses. Now we're saying the shouters were only guessing about the recipe for recovery. And Obama is saying a mere spoonful shouldn't hurt too much.

What we're missing is an in depth cause/effect analysis that will help average taxpayers feel sure that over the long run our (OUR!!!) efforts to stimulate the economy will be effective. There is no time for posturing, which some members of Congress seem to be doing. Since we agree that Obama has the best economic advisors on his team and since these advisors understandably disagree because of their different perspectives, then Congress needs to shut up and let these advisors sort it out. Congress shouldn't try to add or subtract anything unless they have met with these advisors and FULLY understand what is being told to them. NO GUESSING or pretending to understand. There is no room for error or false bravado. We are on the brink of becoming a second tier nation with nukes. We're about to be as embarrassed and weak as Russia after the Cold War. The other countries will then start asking us to get rid of our nukes and abusing us the way we abused and sanctioned other second tier countries. You reap what you sow. We're not emotionally mature enough to accept such a consequence.

[BBackSoon]

I was always told it wasn’t the size of the Stimulus Package but how you use it.

[elsieach]

LOL. So true, so true.

[Veman]

C'mon now, most economists (if they're being brutally honest) will tell you that, to some extent, SIZE DOES MATTER. I'd put the figure at 7 - $7 Trillion is average and can get the job done. Anything too far beyond that - can get painful.

[BBackSoon]

So if we only have 3 Trillion we will be inadequate?

[BLinCincinnati]

Gee... maybe Obama realizes how Congress works... that if you start by asking for something that costs X amount, you end up getting something that costs X+Y+Z amount. So you ask for $775B knowing Congress is going to bloat it to the $1T you wanted anyway. But this way Congress takes the heat for bloating it up... as normal.

[rockyb26]

exactly. that's why he said they'd start at the lower end and see what happens in the legislative process. PEO knows it will go up that's why they haven't given a number.

[december30]

Paul Krugman is a little man. Where did he come from anyways? He is all over the place criticizing Obama, for what? He is not the final authority on the economy. Give me a break Krugman.

[NWBrunette]

He recently won the Nobel Prize in economics. He's got a gazillion times more to contribute to the discussion than you. He also knows way more about economics than Obama.

[elsieach]

I love Paul, too, but I think the Prize has gone to his head.
As far as ALL the criticism goes, IMHO it is premature. Let the man take office, give him, oh...say 2 weeks, and then start dumping on him if warranted.
So many knowledgeable, brilliant armchair quarterbacks sat on their thumbs for eight years while Bush was brewing this stew with the deregulation ingredients Clinton handed him. Can they give Obama 8 weeks to at least assess the damage?

[junebuginFL]

I agree, I think the high expectations are setting him up for more criticism, although I dont know enought about all this money they want to spend. And I dont like the idea of spending a trillion dollars.
Elsie, thank you for also pointing out some of the factors that lead to this problem, most just want to put all the blame on one camp and we cant solve anything if were stuck in that mud.

[Jazzcomedian]

No one really knows with certainty what will work including Mr. Krugman. A few days ago I read an article in the Wall Street Journal which asked eleven different esteemed academic economists for their solutions to our economic crisis, and their answers were all over the place. Absolutely no consensus whatsoever. It's all just guessing, and hoping. The important thing is that something has to be tried, and if it doesn't work, then something else has to be tried. That's what charaterized FDR's tenure as he grappled with the depression. Not everything he tried worked, so he'd try something else. That's all we can realistically hope for, and globally everybody is in the same boat.

Stimulus plans are being tried everywhere, and though it's too early, I haven't as yet read about any quantifiable improvement in any country suffering a downturn.

The only guaranteed money maker at the moment is the Obama commemorative memorabilia industry. That's the only thing that is selling these days. Perhaps we could all work in that industry.

[ema]

The military industry seems to be doing quite well.

[rockyb26]

great post. marked as favorite

[chocolatecity]

As Obama hinted in his interview with John Harwood, he expects there to be changes to the package he presents. He said he started on the low end of the scale because he knows how congress works. He knows the final package won't be 300 billion in tax cuts. But tax cuts do stimulate the economy if you cut taxes on people who will spend the money and hire workers (namely small businesses). He also knows that he will have to spend more on infrastructure. Obama knows how these folks operate, so does Biden, and Emmanuel. This will end up being about a 1 trillion dollar package once all the haggling is over. Patience Krugman. You understands economics but he can be politically naive sometimes.

[BBackSoon]

Well put and you saved me some time. Now I can spend that time commenting on another post.

See how this works?

[Wal2009]

What are the limitations of the Obama Tax Cut?
The focus on “keeping tax low” as the whole solution for a 21st century economy is at some extent misleading.

The mechanism of the unfair trade can be resolved if leading economies can move away from relying solely on custom duties and create a Free trade rate index (FTRI) to counter the unfair tax imposition on local markets on foreign goods. If you see the NAFTA, the effect is lower because of the relative difference between tax rates between U.S.( around 7%) , Canada (7%) and Mexico(10% in some area). The advantage is that China will have to choose between increasing his currency or face the FTRI on goods sold overseas. Because of the high cost of goods coming from overseas, companies will move back to the United States because of the tax advantage.

Please let us stop the politics of slogans such as “Drill Baby Drill” or “Keep the tax Low” as solutions for complicated macro economist challenges. There is a real challenge in our sales tax structure to compete with foreign goods, and if the we don’t change the mechanism of sales tax or work with the international world to impose the Free Trade Rate Index that I propose, we will have to work hard to find the remedy if we expect to reverse the trade deficit and the outsourcing of American jobs very soon.

[vjoseph]

Paul, I swear, you are far more whiny than those GOPers you accused of being whiny. First off, the stimulus plan is in its infancy. When Congress goes through it, it would grow. You know this, yet you continue to whine. This is unbelievable

[bygollymissmolly]

Ok Paul, perhaps you can tell Obama how he can get a bigger stimulus package passed through Congress. He's going to have a hard enough fight getting the one he is proposing through.

I love you Paul Krugman, but you really do need to cut Obama some slack here and be a little more realistic about exactly what Obama can do right now.

[harriscrl3]

Exactly he must think that we are some kind of monopolistic government and that Obama can get it pass by just doing what he wants that he doesnt have to get through congress. He is an eocnomist Obama is a politician and has to think like one. Its this idea that they think that Obama can just wave a magic wand and everything will be done. Its Got to STOP.

Carol

[ema]

I thought we dems had the majority? It's not like he's working with a Republican congress. I understand he's trying to get everyone on board, but at what cost?

[harriscrl3]

Yeah and since when has Dems been that much different than republicans. I've always felt that they will be the most problem for Obama and so far I'm right they are getting backbone to show they are strong because they've been demoralized through the Bush administration but sadly they are getting it wrong again. Obama has an 80% approval rating and they are fighting him and when bush had a 20% approval rating they rolled over for him. Frankly I've voted Dem for most of my life but at times Ive seen little difference between them and republican.

Carol

[LetMeUnderstandThis]

First he criticizes him on the Stim-Pack and now it isn't enough, please

[Madampotential]

Sounds like Obama may be a little too willing to lay down for the GOP in order to get republicans to approve his policies..­. I am so glad the progressive leadership in congress will be there to check the Obama administration on these things for the next four yrs... Thank goodness for Nancy Pelosi and John Kerry!! We need more investment in job training programs for energy and healthcare fields.

[Peace15Progress]

Krugman was one of the few that predicted the current economic collapse and most of his predictions and prescriptions have been spot on. While I understand Obama's desire to appease the Right, whose only policy tools for addressing any problem that comes along seem to be A) war and B) tax cuts, I don't see how $500 per person in tax cuts will take us out of the biggest economic ditch in 70 years. Personally, I'm going to take that money and stuff it in my mattress or use it to pay down a bit of my gargantuan student debt. Neither of which will stimulate the economy much at all.

[Jacqueline3]

So why don't Krugman come up with a better plan and stop yapping his mouth.

[MyNameIsJames]

Good point -- better yet - Is the Obama team talking to Krugman? Krugman has been a critic of Obama because he feels that Obama is more talk than real action. Krugman can do more good working inside the Obama administration.

My question is.... Will the triangulators within the Obama administration welcome an unabashed liberal?

[bygollymissmolly]

Actually, Krugman frequently talks to the Obama team. They respect him and his opinion. Unfortunately Obama has to deal with the realities that are before him. He doesn't have a 60 majority in the Senate so anything he proposes will be subject to a Republican filibuster. And since the Republicans could care less if our house of cards economy crashes, they will be filibustering.

[wayoutleft]

no. no liberals. rick warren and sec gates- but no liberals.