When Mr. Obama first proposed $800 billion in fiscal stimulus [in Spring/2009], there were two groups of critics. Both argued that unemployment would stay high — but for very different reasons.One group — the group that got almost all the attention — declared that the stimulus was much too large, and would lead to disaster. If you were, say, reading The Wall Street Journal's opinion pages in early 2009, you would have been repeatedly informed that the Obama plan would lead to skyrocketing interest rates and soaring inflation.
The other group, which included yours truly, warned that the plan was much too small given the economic forecasts then available. As I pointed out in February 2009, the Congressional Budget Office was predicting a $2.9 trillion hole in the economy over the next two years; an $800 billion program, partly consisting of tax cuts that would have happened anyway, just wasn't up to the task of filling that hole.
Critics in the second camp were particularly worried about what would happen this year, since the stimulus would have its maximum effect on growth in late 2009 then gradually fade out. Last year, many of us were already warning that the economy might stall in the second half of 2010.
Oh, and don't tell me that Germany proves that austerity, not stimulus, is the way to go. Germany actually did quite a lot of stimulus — the austerity is all in the future. Also, it never had a housing bubble that burst. And with all that, German G.D.P. is still further below its precrisis peak than American G.D.P. True, Germany has done better in terms of employment — but that's because strong unions and government policy have prevented American-style mass layoffs.
For more, see The Real Story by Paul Krugman, September 2, 2010, at The New York Times.
1 comment:
Germany started austerity over 20 years ago when the government and the people collectively realized that they were becoming less competitive globally. They made their corporate tax rates low, introduced a high VAT, reduced entitlements and concentrated on their vaunted apprentice and hochschul system. Thus, they developed superior technical workers while retaining superior scientific universities. This policy is now paying off. It is the result of sound industrial policy aimed at keeping a sound industrial base. Contrary to the summary line of the article, they developed and retained superior, competitive products that are in demand so didn't need layoffs. Thus, they didn't do it.
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