Krugman Responds to Obama's Request for Ideas

Paul Krugman has written a response to Obama's request for ideas on: “how to spend money efficiently and effectively to jump-start the economy.” First, Krugman briefly explains that: "the “jump-start” metaphor is part of the problem. Then Krugman makes the suggestion that: "First, Mr. Obama should scrap his proposal for $150 billion in business tax cuts, which would do little to help the economy. Ideally he’d scrap the proposed $150 billion payroll tax cut as well, though I’m aware that it was a campaign promise." Then according to Krugman, the $150 billion saved "on ineffective tax cuts could be used to provide further relief to Americans in distress — enhanced unemployment benefits, expanded Medicaid and more. And why not get an early start on the insurance subsidies — probably running at $100 billion or more per year — that will be essential if we’re going to achieve universal health care?" In general terms, Krugman wants to see Obama create a much larger plan. Krugman enhances his suggestions by quoting that: "On Saturday, Christina Romer, the future head of the Council of Economic Advisers, and Jared Bernstein, who will be the vice president’s chief economist, released estimates of what the Obama economic plan would accomplish. Their report is reasonable and intellectually honest, which is a welcome change from the fuzzy math of the last eight years. But the report also makes it clear that the plan falls well short of what the economy needs." Krugman explains Romer's and Bernstein's assessments that: "the Obama plan would have its maximum impact in the fourth quarter of 2010. Without the plan, they project, the unemployment rate in that quarter would be a disastrous 8.8 percent. Yet even with the plan, unemployment would be 7 percent — roughly as high as it is now." The plan would loose its effectiveness after 2010, falling short of establishing a "full recovery" and positioning "the unemployment rate" at "a painful 6.3 percent in the last quarter of 2011." Krugman accepts the possibility that "things could turn out better than the report predicts. But they could also turn out worse. The report itself acknowledges that “some private forecasters anticipate unemployment rates as high as 11 percent in the absence of action.”" Krugman voices his agreement with Lawrence Summers who has said that: "In this crisis, doing too little poses a greater threat than doing too much.” Unfortunately, that principle isn’t reflected in the current plan." These observations prompt Krugman to ask: "So how can Mr. Obama do more?" Swiftly followed by Krugman's observation: "By including a lot more public investment in his plan — which will be possible if he takes a longer view." Krugman points out that: "The Romer-Bernstein report acknowledges that “a dollar of infrastructure spending is more effective in creating jobs than a dollar of tax cuts.”" It argues, however, that “there is a limit on how much government investment can be carried out efficiently in a short time frame.” Leading Krugman to ask: "But why does the time frame have to be short? As far as I can tell," Krugman notes; "Mr. Obama’s planners have focused on investment projects that will deliver their main jobs boost over the next two years. But since unemployment is likely to remain high well beyond that two-year window, the plan should also include longer-term investment projects. And bear in mind" Krugman interjects; "that even a project that delivers its main punch in, say, 2011 can provide significant economic support in earlier years." Krugman believes that even "If Mr. Obama drops the “jump-start” metaphor, if he accepts the reality that we need a multi-year program rather than a short burst of activity, he can create a lot more jobs through government investment, even in the near term." This observation leaves Krugman searching for an answer to his question: "Still, shouldn’t Mr. Obama wait for proof that a bigger, longer-term plan is needed?" Krugman is direct and answers: "No." Because according to Krugman's analysis: "Right now the investment portion of the Obama plan is limited by a shortage of “shovel ready” projects, projects ready to go on short notice. A lot more investment can be under way by late 2010 or 2011 if Mr. Obama gives the go-ahead now — but if he waits too long before deciding, that window of opportunity will be gone." Krugman makes it a point to write: "One more thing: even with the Obama plan, the Romer-Bernstein report predicts an average unemployment rate of 7.3 percent over the next three years. That’s a scary number, big enough to pose a real risk that the U.S. economy will get stuck in a Japan-type deflationary trap." Krugman concludes his short bit of "...advice to the Obama team" by briefly suggesting "to scrap the business tax cuts, and, more important, to deal with the threat of doing too little by doing more. And the way to do more is to stop talking about jump-starts and look more broadly at the possibilities for government investment." Obama said the other day that he would be willing to listen to critics; Paul Krugman included. So lets all hope Mr. Obama takes a moment to read and consider Krugman's column today. We might all benefit from Obama's curiosity.