THEY DIDN’T ERR ON THE SIDE OF TOO MUCH…. Back in November, Paul Krugman advised Barack Obama and his team to figure out what kind of stimulus the economy actually needs and then “add 50 percent.” As Krugman saw it, “It’s much better, in a depressed economy, to err on the side of too much stimulus than on the side of too little.”
That sounds reasonable enough. The Fed has already cut interest rates and extended credit. Congress has already cut taxes. The CBO nevertheless believes the economy will fall $1 trillion short this year, and another $1 trillion short next year. The point of the stimulus package is to help make up at least some of the difference to get the economy back on track. More money from the federal government means more jobs, more investment, and more capital in the system.
Republican “centrists” in the Senate, we now know, felt more comfortable with a smaller stimulus, and had the political clout to demand the changes (due to GOP obstructionism, a 58-member majority couldn’t pass the bill without approving the “centrists’” cuts). Krugman has given the resulting package a look, and is obviously discouraged.
Now the centrists have shaved off $86 billion in spending — much of it among the most effective and most needed parts of the plan. In particular, aid to state governments, which are in desperate straits, is both fast — because it prevents spending cuts rather than having to start up new projects — and effective, because it would in fact be spent; plus state and local governments are cutting back on essentials, so the social value of this spending would be high. But in the name of mighty centrism, $40 billion of that aid has been cut out.
My first cut says that the changes to the Senate bill will ensure that we have at least 600,000 fewer Americans employed over the next two years.
Dean Baker is thinking along the same lines: “We should talk about the spending cuts as job cuts. So cutting $100 billion from the stimulus means that they cut 500,000 jobs. (Working with the Romer-Bernstein numbers, $100 billion would increase GDP by $150 billion. This equals 1 percent, which they calculate translates into 1 million jobs. We divide by two [2-year savings] and get 500,000 jobs.) So the Collins-Nelson crew just cost 500,000 people their jobs. Isn’t fiscal responsibility wonderful?”
There are, of course, some opportunities for improvement. We don’t know what House-Senate negotiators will produce; we don’t know if a White House p.r. initiative will improve the political climate; and we don’t know if President Obama will have the opportunity to come back to Congress later this year or next, asking for additional stimulus investment, the way George W. Bush kept returning to Congress, demanding limitless funds for the war in Iraq.
I guess we’ll see soon enough.