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New York Times Death Spiral Watch: David Leonhardt Needs His Own Weblog

Paul Krugman Doesn't Like the Stimulus Package

He writes:

Stimulus Gone Bad - New York Times: the Democrats appear to have buckled in the face of the Bush administration’s ideological rigidity, dropping demands for provisions that would have helped those most in need. And those happen to be the same provisions that might actually have made the stimulus plan effective.

Those are harsh words, so let me explain what’s going on.

Aside from business tax breaks — which are an unhappy story for another column — the plan gives each worker making less than $75,000 a $300 check, plus additional amounts to people who make enough to pay substantial sums in income tax. This ensures that the bulk of the money would go to people who are doing O.K. financially — which misses the whole point.

The goal of a stimulus plan should be to support overall spending, so as to avert or limit the depth of a recession. If the money the government lays out doesn’t get spent — if it just gets added to people’s bank accounts or used to pay off debts — the plan will have failed... sending checks to people in good financial shape does little or nothing to increase overall spending.... On the other hand, money delivered to people who aren’t in good financial shape — who are short on cash and living check to check — does double duty: it alleviates hardship and also pumps up consumer spending.

That’s why many of the stimulus proposals we were hearing just a few days ago focused in the first place on expanding programs that specifically help people who have fallen on hard times, especially unemployment insurance and food stamps. And these were the stimulus ideas that received the highest grades in a recent analysis by the nonpartisan Congressional Budget Office.

There was also some talk among Democrats about providing temporary aid to state and local governments, whose finances are being pummeled by the weakening economy. Like help for the unemployed, this would have done double duty, averting hardship and heading off spending cuts that could worsen the downturn.

But the Bush administration has apparently succeeded in killing all of these ideas, in favor of a plan that mainly gives money to those least likely to spend it.... [T]he result is a plan that not only fails to deliver help where it’s most needed, but is likely to fail as a [recession-fighting] economic measure....

And the worst of it is that the Democrats, who should have been in a strong position — does this administration have any credibility left on economic policy? — appear to have caved in almost completely. Yes, they extracted some concessions, increasing rebates for people with low income while reducing giveaways to the affluent. But basically they allowed themselves to be bullied into doing things the Bush administration’s way...

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