Tags: Krugman | fiscal | stimulus | economic

Krugman: Fiscal Stimulus Was Economic Success, 'Political Disaster'

Friday, 21 Feb 2014 10:56 AM

By Dan Weil

The estimated $831 billion fiscal stimulus package engineered by President Obama and congressional Democrats five years ago did much good, but was a political disaster, says Nobel laureate economist Paul Krugman.

"And the consequences of that political disaster — the perception that stimulus failed — have haunted economic policy ever since," he writes in The New York Times.

As for the benefits of the stimulus, "it helped end the economy's plunge," Krugman says. "It created or saved millions of jobs; it left behind an important legacy of public and private investment."

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The economy at the time faced a huge spending shortfall. And it was so hard hit by the financial crisis and the housing bust that the Federal Reserve couldn't fight off the recession by itself by cutting short-term interest rates like it normally does, he explains.

So why do so many people view the stimulus as a failure? "Because the U.S. economy continued to perform poorly," Krugman writes.

"There's no mystery about why: America was coping with the legacy of a giant housing bubble. . . . The stimulus was both too small and too short-lived to overcome that dire legacy," he notes.

However, he adds, "The important point is that U.S. fiscal policy went completely in the wrong direction after 2010. With the stimulus perceived as a failure, job creation almost disappeared from inside-the-Beltway discourse, replaced with obsessive concern over budget deficits.

"Government spending, which had been temporarily boosted both by the Recovery Act and by safety-net programs like food stamps and unemployment benefits, began falling, with public investment hit worst. And this anti-stimulus has destroyed millions of jobs."

Many disagree with Krugman, of course. One is Wall Street Journal columnist James Freeman. "The failure of the stimulus was a failure of the neo-Keynesian belief that economies can be jolted into action by a wave of government spending," he writes.

"In fact, people are smart enough to realize that every dollar poured into the economy via government spending must eventually be taken out of the productive economy in the form of taxes."

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