NY Times, January 9, 2009
Op-Ed Columnist
The Obama Gap
By PAUL KRUGMAN
“I don’t believe it’s too late to change course, but it will be if we
don’t take dramatic action as soon as possible. If nothing is done, this
recession could linger for years.”
So declared President-elect Barack Obama on Thursday, explaining why the
nation needs an extremely aggressive government response to the economic
downturn. He’s right. This is the most dangerous economic crisis since
the Great Depression, and it could all too easily turn into a prolonged
slump.
But Mr. Obama’s prescription doesn’t live up to his diagnosis. The
economic plan he’s offering isn’t as strong as his language about the
economic threat. In fact, it falls well short of what’s needed.
Bear in mind just how big the U.S. economy is. Given sufficient demand
for its output, America would produce more than $30 trillion worth of
goods and services over the next two years. But with both consumer
spending and business investment plunging, a huge gap is opening up
between what the American economy can produce and what it’s able to sell.
And the Obama plan is nowhere near big enough to fill this “output gap.”
Earlier this week, the Congressional Budget Office came out with its
latest analysis of the budget and economic outlook. The budget office
says that in the absence of a stimulus plan, the unemployment rate would
rise above 9 percent by early 2010, and stay high for years to come.
Grim as this projection is, by the way, it’s actually optimistic
compared with some independent forecasts. Mr. Obama himself has been
saying that without a stimulus plan, the unemployment rate could go into
double digits.
Even the C.B.O. says, however, that “economic output over the next two
years will average 6.8 percent below its potential.” This translates
into $2.1 trillion of lost production. “Our economy could fall $1
trillion short of its full capacity,” declared Mr. Obama on Thursday.
Well, he was actually understating things.
To close a gap of more than $2 trillion — possibly a lot more, if the
budget office projections turn out to be too optimistic — Mr. Obama
offers a $775 billion plan. And that’s not enough.
Now, fiscal stimulus can sometimes have a “multiplier” effect: In
addition to the direct effects of, say, investment in infrastructure on
demand, there can be a further indirect effect as higher incomes lead to
higher consumer spending. Standard estimates suggest that a dollar of
public spending raises G.D.P. by around $1.50.
But only about 60 percent of the Obama plan consists of public spending.
The rest consists of tax cuts — and many economists are skeptical about
how much these tax cuts, especially the tax breaks for business, will
actually do to boost spending. (A number of Senate Democrats apparently
share these doubts.) Howard Gleckman of the nonpartisan Tax Policy
Center summed it up in the title of a recent blog posting: “lots of
buck, not much bang.”
The bottom line is that the Obama plan is unlikely to close more than
half of the looming output gap, and could easily end up doing less than
a third of the job.
Why isn’t Mr. Obama trying to do more?
Is the plan being limited by fear of debt? There are dangers associated
with large-scale government borrowing — and this week’s C.B.O. report
projected a $1.2 trillion deficit for this year. But it would be even
more dangerous to fall short in rescuing the economy. The
president-elect spoke eloquently and accurately on Thursday about the
consequences of failing to act — there’s a real risk that we’ll slide
into a prolonged, Japanese-style deflationary trap — but the
consequences of failing to act adequately aren’t much better.
Is the plan being limited by a lack of spending opportunities? There are
only a limited number of “shovel-ready” public investment projects —
that is, projects that can be started quickly enough to help the economy
in the near term. But there are other forms of public spending,
especially on health care, that could do good while aiding the economy
in its hour of need.
Or is the plan being limited by political caution? Press reports last
month indicated that Obama aides were anxious to keep the final price
tag on the plan below the politically sensitive trillion-dollar mark.
There also have been suggestions that the plan’s inclusion of large
business tax cuts, which add to its cost but will do little for the
economy, is an attempt to win Republican votes in Congress.
Whatever the explanation, the Obama plan just doesn’t look adequate to
the economy’s need. To be sure, a third of a loaf is better than none.
But right now we seem to be facing two major economic gaps: the gap
between the economy’s potential and its likely performance, and the gap
between Mr. Obama’s stern economic rhetoric and his somewhat
disappointing economic plan.
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