by Frank James
Paul Krugman is one of the smartest, most entertaining economists alive which explains why he may the best known too,
The New York Times columnist and Princeton University professor appeared at the National Press Club in Washington Friday, fresh on the heels of receiving his Nobel Prize. And he simultaneously scared the audience out of its wits and left them laughing and wanting more, not a bad achievement for a practitioner of the dismal science.
A few important Krugman points:
The stimulus is going to have to be extremely big to work. It takes about $200 billion of well-spent federal stimulus to drop unemployment one percentage point. He thinks unemployment could hit 10 percent before things turn around. So that argues for a $1 trillion stimulus not over two years but faster.
The problem is, President-elect Obama talks about the money going to shovel-ready infrastructure projects. But the best number Krugman has heard puts the amount of such projects that could be quickly started at something like $150 billion, far short of what's needed. That's a big problem, especially since he argues the stimulus must be done quickly.
Krugman worries about what part of the economy will kick in to take up the slack after the stimulus. That's very unclear.
Krugman believes 2010 will see improved economic conditions as the stimulus workes its way through. But 2009 scares him. And if he's scared, I'm scared too.
Here's a lengthy excerpt of Krugman's remarks which starts with his discussion of economic stimulus:
Size: How big should this all be? And we're now hearing reports of 850 billion (dollars) over two years from the incoming administration, which is actually almost certainly not enough to really bring the economy back anywhere close to full employment, although I can understand why they're reluctant to have -- to hit the big T and go up to a trillion.
Let me just give you my back of the envelope. I'm sorry; I'm going to get a little wonkish for a second here. We think that the multiplier -- right -- you spend -- you build a bridge. The people you hire to build the bridge then have more money and they go and buy more consumer goods. They buy -- that creates more jobs, and so on.
But even when all of that's said and done, we think that a dollar of federal spending probably creates only something like a dollar and a half of GDP, more than the amount you spend but not vastly larger. That means that if you do 200 billion (dollars) of spending, that's probably 300 billion (dollars) of GDP, which is 2 percent, and it takes about a 2 percent rise in GDP to shave 1 percent off the unemployment rate.
So, sorry about that. Basically, 200 billion (dollars) for a year to reduce the unemployment rate in that year by one percentage point. That's a rough number.
We're probably on a track, absent policy intervention, to have an unemployment rate of between 9 and 10 percent by the end of this year. So you start to think about that, you see that 850 billion (dollars) over two years is not a lot of money. It's actually well short of what we would probably need to get anywhere close to -- let's have -- 5 percent unemployment rate.
Why not just go ahead and do more? Key problem right now is time and speed. Infrastructure spending is clearly -- I'd say clearly the best thing we could do right now. The problem is you can't just say, okay, let's start -- let's start doing major environmental initiatives and spend the money starting next week. Takes time. Takes time to get stuff going.
So the question is -- the term -- I'm sure everybody's heard it now -- is shovel-ready. How much shovel-ready stuff do we have? And shovel-ready actually doesn't mean you can start next week. Shovel- ready generally means you can start within six months. And even so, there are limits.
So I'm seeing numbers like max, $150 billion is shovel-ready; now, maybe. We've got some very smart people, very creative people coming in. Maybe they can find more of that. But the immediate problem is actually going to be, how can you get enough stuff going in time to slow this economy's nosedive?
I will be shocked if despite everything that the Obama people are trying to do, if they can stop the unemployment rate before 8 percent. In fact, my guess is, it will hit 9 percent, before they finally are getting enough traction to turn it around, late this year. I mean, as you know, economic forecasts are not exactly precise. But it's going to be very difficult.
The problem immediately now is really one of speed, getting this stuff going. You can try other stuff. You can try -- some things are faster -- aid to the unemployed, aid to state and local governments, because one thing you can do quickly. If you can't start spending quickly, you can avert cuts in spending fairly quickly, so aid to state and local governments, all of that we're hearing about. But it's going to be really, really hard.
How does this all end? I think I'm quite optimistic. I'm scared to death of next year. I'm quite optimistic about the year after that, because then the stimulus will be coming online. And we will be getting a lot of boost. And the team coming into the White House does understand that. They understand the economy; they -- you know, at least as well as anyone does. They understand the needs.
I start to get concerned again, once you look further out, because I take a look and say, well, okay, we do know how to boost the economy. If we do a lot of federal spending, that will boost the economy. We can't do it -- our immediate problem is how to do it fast enough.
What I don't know is what the endgame looks like. Eventually you want the private economy to step back in. You want to withdraw this. Eventually we have to start worrying about servicing the debt we've run up in the course of the stimulus program. But I don't have a clear story about which part of the private sector takes up the slack, after the federal government, after the stimulus is done.
Hopefully we'll get a better read on that a little bit further out. But that is going to be a big issue. I mean, we look at -- you know, the Great Depression was ended by a large public works program known as World War II.
What we really still don't understand very well is why, when the war was over, the Depression didn't come back.
We actually don't know that very well. And that's a question that I think we're going to want to think about quite a lot, in its modern guise, as we look forward.
Scary times. You know, professionally there is a part of me that says, you know, this is the crisis I always wanted to live through, because this is what, you know, economists have studied. But of course, as a(n) actual human being, it's horrific. (Laughter.) It's -- it is awesomely dangerous.
I don't think -- although I think we clearly are back in depression economics, I don't think we're actually talking about another Depression. But there's only reason -- one reason for that. It's not that the things that made the Great Depression happen are impossible in the modern world; in fact, exactly those things, in a 21st-century version, are happening right now.
The only thing that means -- that will prevent us from having another Great Depression is that I think we learned something from the last time we had this experience, and that we have some idea of how to avert the worst. So everything, right now, hinges on whether we've got -- whether we understand this stuff even as well as I think we do, and whether the tools that are at hand are enough to pull us back from the brink. I think so. I'm not quite as confident of that as I would have -- even I would have been a year ago.
Scary times. Let's wish us -- let's wish ourselves the best of luck.
Comments
Why don't we start by charging both Bush administrations with malfeasance and incompetence ? i mean, officially and legally !! That would be the best possible beginning, to cleaning up this mess they have caused !! There is no avoiding it. To boot, we should charge every voter who voted for the Incompetent One, and is " snarling " sidekick, even once, a surcharge of a percentage of their income, actual, not virtual !! I think we could recoup some of our taxpayer losses. You might ask, how would we know, who voted for them!!? Do you think, we can rely on the honor system, with them !!?
SUPPORT OUR TROOPS, BRING THEM HOME, ALIVE AND WHOLE. NOW.
Posted by: Don Fitzgerald, Chicago | December 21, 2008 9:56 AM
I would look very closely at what Regan did following Carter. Most of this government (deficit spending) stimulus package will be wasted (I live in Il.) or corrupted by politics. Spending on credit with other people's money is disaster waiting to happen...just like "bailoutmania". But look on the up side, we got Afghanistan and Obama going into Pakistan and open new markets withi Cuba and the "new" moderate Muslins. Sweet dreams...big daddy government is coming.
Posted by: Bubba Porter | December 21, 2008 10:12 AM
Keynesian Economic policy (govt. spending causes economic growth) does not work as well as freeing up private enterprises to find what people really do want to spend their money on. Krugman admits this, w/o knowing it: "Eventually you want the private economy to step back in." How can they, unless govt. gets out of the way? Govts cannot create wealth, they can only re-distribute it. And show me where that has worked.
We are doomed, because the kind of thinking Krugman talks about is so prevalent: Govt. has to solve our economic problems. Wrong. Release the private sector from taxes ands regulations, and it will get us out of this recession.
Posted by: Steve Wenneborg | December 21, 2008 3:43 PM
Hopefully, this suggests Krugman won't be pandering to and and shilling for the labor organization propoganda machine American Rights at Work by claiming unionization has declined to 7.5% solely because of union-busting consultants, of which there is no credible objective evidence but plenty of union propaganda. The Wagner Act undoubtedly extended the Great Depression by driving up wages and unemployment. Taking away even the worker free choice protection of a secret-ballot election that was part and parcel of the Wagner Act would certainly worsen current economic conditions. But even if we accepted that employers universally reject unionization as constituted under the National Labor Relations Act, shouldn't that give us a clue that just empowering unions over worker choice isn't going to fix anything?
Whatever your religion (or not), there is wisdom in these words: "Whither thou goest, I will go; and where thou loegest, I will lodge; thy people shall be my people, and thy God my God." Let us reject rhetoric that seeks to exploit division and false classism. Let us find a constructive system that allows employees to help themselves and their employers at the same time.
Posted by: Krugman is a Union Shill | December 21, 2008 4:07 PM
In typical Bush-McCain Republican fashion, opponents of the Employee Free Choice Act, EFCA, are spreading, their stock in trade, of misinformation and distortions of the facts. Don' t take my word for it, google EFCA, and you will see, who is shilling for whom. Big Business and its lackeys, the Bush-McCain Republicans, don't want to share in the wealth of this land. Corporate America doesn't want to share the fruits of the worker's labors, they want to hoard the profits. That is the exact same mentality that has crippled Wall Street and the CEOs and their management teams of the Big 3. Attention America, workers deserve the right to start unions, just as Bankers, Investment Houses and Insurance Corps have their Associations, so should workers have their unions !!! Come on, Secretary of Labor-elect Solis, help promote the cause of EFCA. The Bill, EFCA, passed the House of Representatives once, but was stymied in the Senate, by the usual obstructionists, The Republicans. This time, we have President-elect Obama, who will be fair to all parties, which includes the workers !!
SUPPORT OUR TROOPS, BRING THEM HOME, ALIVE AND WHOLE. NOW.
Posted by: Don Fitzgerald, Chicago | December 22, 2008 7:55 AM
We have an income problem in America. Most Americans (except for the richest 1%) have largely been left out of recent good times economically speaking.
The average worker has seen their share of the average economic dollar shrinking since 1973. We have the highest concentration of wealth in the top 1 % now (about 26% of all income) since just before the Great Depression of 1929 (29%). It was slightly higher than 10% in 1979.
We need increased unionization and much more progressive taxation to restore a sound economy for the majority. We need to end these falsely named "free trade" deals which are creating an international race to the bottom. Without government provided universal healthcare like all our international competitors have, "free trade" is national economic suicide.
Posted by: Stephen Crockett | December 22, 2008 11:42 PM
I have great respect for Paul Krugman and avidly read his NYT columns. I agree with his bleak assessment of 2009, but cannot agree with his hopeful take for 2010. He says we learned from the depression. Yes we did, but then after 65-70 years we have forgotten those lessons. Witness the repeal of the Glass-Steagal Act of 1933, and the deregulation craze of the past 20 years. The safeguards that were in place to prevent another depression are largely gone or reduced. They stopped the ability to buy stock on 90% margin, but replaced it with people of no means being able to buy houses with no downpayments. And the leverage employed by financial firms: up to 30 times leverage, makes 1929 look quaint. The Sherman Antitrust Act of 1890 has not been enforced, with the result of so many "too big to fail" firms. And this isn't even getting into the derivatives; "taxpayers" or more accurately the holders of US dollars have lost more than $100Billion on AIG alone, to help that company make good its credit default swaps. How many more of those are there, where if we let go, will cause the economy to completely implode? Then the $50 trillion US unfunded liabilities that no one seems to talk about; where is the money to come from to pay for that? Are we going to print it? That did not work very well in Weimar Germany. I think the only thing that will help is a targeted stimulus of training then hiring millions of people to do "green" jobs such as weatherizing homes, installing windmills and solar power.
To be paid for by higher taxes on all carbon producing activities: a much higher gas tax to start, Yes this will be tough; everyone says we did it in World War II, and we can do it again. But only if we sacrifice like we did then: gas rationing, much lower consumption, enforced saving and putting that money into "green bonds" and the like. China can't bail us out of this one.
Posted by: Frank Vaughan | December 23, 2008 7:05 AM
Krugman has been addressing this issue for awhile now--for most of the past 28 years we've been shorting infrastructure spending because the dominant political meme is that taxes are 'bad'. It would make sense to spend to spend such monies regardless of whether we are facing an economic downturn.
Longer term, the government needs to have taxes match spending. The GOP's 'deficit hawks' are right about the issues of deficit spending, but they never held the Bush administration to account when Bush launched his tax cuts and his wars at the same time.
Posted by: Mister Bad Example | December 23, 2008 7:20 AM
SW writes: "Release the private sector from taxes and regulations, and it will get us out of this recession."
This has been the modus operandi for years and look where we are. Let's giving this talking point a decent burial.
Posted by: BWD | December 23, 2008 10:51 AM
I wonder if these are even real people who are posting here about the wonders of magical capitalism. That would be the same unregulated capitalism that caused this calamity for those who are keeping score by the way. They defend the right of CEO's to take home billions of dollars in bonuses even as they are beating on the diminishing middle class for having the audacity to ask for a living wage. If it was up to these Republicans, they would have Americans compete with Chinese solely based on price. Currently Chinese earn an average of $1.47 an hour. I don't know why but I have an aversion to competing on that based solely on price. Maybe I am a Communist? Oh wait, the Chinese are the Communists. In that case maybe the Republicans are Communists? Close enough anyway I think. Republicans believe in centralization of power, corruption and destroying the rights of their citizens just like Communists. If it walks like a duck...
Posted by: Chris Giaccone | December 23, 2008 5:30 PM