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.

Obama and Congressional Democrats Contemplate Expanding Help to Jobless Americans

JACKIE CALMES and CARL HULSE report in the New York Times that: “President-elect Barack Obama and Congressional Democrats are considering major expansions of government-assisted health care insurance and unemployment compensation as they begin intensive work this week on a two-year economic recovery package. One proposal, as described by Democratic advisers, would extend unemployment compensation to part-time workers, an idea that Congressional Republicans have blocked in the past. Other policy changes would subsidize employers’ expenses for temporarily continuing health insurance coverage to laid-off and retired workers and their dependents, as mandated under a 22-year-old federal law known as Cobra, and allow workers who lose jobs that did not come with insurance benefits to be eligible, for the first time, to apply for Medicaid coverage.” In his weekly YouTube and radio address on Saturday Obama explained the need for swift action. “Economists from across the political spectrum agree that if we don’t act swiftly and boldly,” Mr. Obama said, “we could see a much deeper economic downturn that could lead to double digit unemployment and the American dream slipping further and further out of reach.” In describing his economic plan, Obama said he intends to use government spending and tax incentives to increase renewable energy production; prioritize energy efficient government buildings; make infrastructure repairs and improvements; and bring modernized methods to health care and he pledged to “put people back to work today and reduce our dependence on foreign oil tomorrow.” Obama also intends to “reshape the economy, especially for the good of low-wage and middle-class workers.” One of Obama’s goals is “that he would seek money to develop a national energy grid to harness and distribute power from wind, water and other local alternative energy sources.” Congressional Democrats plan to be very aggressive in keeping “...the emerging legislation free of the pork-barrel projects that could invite criticism from Republicans and foster public skepticism.” House leadership has pledged that: “Every dollar will have to be justified as to whether it is targeted to our economy,” Speaker Nancy Pelosi, Democrat of California, said last week. “This is not a bill that will be an excuse to put things in that otherwise might not be justified.” Democrats are under extreme pressure to produce meaningful results without overspending. “...officials said the size of the proposed two-year stimulus, equivalent to nearly a year of federal discretionary spending, had tested imaginations both in Congress and the Obama camp. Aides and advisers are struggling to identify enough projects that would meet Mr. Obama’s criteria that they be truly stimulative, create jobs and not be open to being branded as pork. This has really forced people to think outside the box,” one aide on the House Appropriations Committee said, “because this is more money than anybody expected to be spending.” There have also been: “Tensions on the opposite side involve demands from fiscally conservative Blue Dog Democrats in the House and from some Senate Democrats — notably the Senate Budget Committee chairman, Kent Conrad of North Dakota — for provisions imposing budgetary controls on future spending and tax cuts for the long-term health of the economy. According to both sides, Obama officials have assured the fiscal conservatives that Mr. Obama would propose long-term controls in his first five-year budget, which is due by late February.” Conservative democrats “support deficit spending to jump-start the economy” but they also make the case that proper planning must be in place to retire the creation of increased debt. An idea that is making its way among Democrats is the creation of “a bipartisan commission to propose limits on future benefits for Social Security, Medicare and Medicaid, the entitlement programs whose projected future costs would squeeze out all other spending; a nonpartisan entity to designate infrastructure projects, like roads and public buildings, based on merit, and federal pay-as-you-go rules requiring offsetting savings for spending increases and new tax cuts.”