Paul Krugman, winner of the Nobel Prize in Economics and op-ed writer for the New York Times, which gives him some (Wall)street cred, predicted the Obama stimulus plan that was emerging after his election would be judged a failure. This in a January 6th, 2009 New York Times article, a full 14 days before he was even president.
He wrote a wonkish article with a lot of economic theory and lingo. But a couple excerpts give the outcomes of that wonkishness:
The bottom line is this: we’re probably looking at a plan that will shave less than 2 percentage points off the average unemployment rate for the next two years, and possibly quite a lot less. This raises real concerns about whether the incoming administration is lowballing its plans in an attempt to get bipartisan consensus….
And that gets us to politics. This really does look like a plan that falls well short of what advocates of strong stimulus were hoping for — and it seems as if that was done in order to win Republican votes. Yet even if the plan gets the hoped-for 80 votes in the Senate, which seems doubtful, responsibility for the plan’s perceived failure, if it’s spun that way, will be placed on Democrats.
I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says “See, government spending doesn’t work.”
Let’s hope I’ve got this wrong.
To summarize what he was getting at, the Great Recession took out a lot more money, mostly in stock and housing values, than the emerging stimulus was going to put in. Krugman’s model, based on Keynesian economics, suggested this would stop the plunge but do little to bring us back to full employment; and that the Republicans, who turned the budget surplus they inherited from the Clinton administration, into such a major deficit the USA was hemmed in from borrowing the sums it needed to fully stimulate the economy, these same Republicans would blame Obama and Keynesian economics for the failure.
In fact looking back at that old prediction we can see it has come pretty much true with one caveat: Krugman, Obama, and the country were unaware at the time that the recession was much worse than they thought. More recent analysis published Continue reading