Fiscal Policy Watch: Anyone Have a Good Feeling About the Next Employment Report? Anyone? Anyone? Bueller?
I certainly don't.
And once again I am reminded of the two rules for understanding the world:
- Paul Krugman is right.
- If you ever think Paul Krugman is wrong, refer to rule #1.
What I was afraid of: Back in March, when I was lamenting the inadequate size of the Obama stimulus, I made this prediction:
Republicans are now firmly committed to the view that we should do nothing to respond to the economic crisis, except cut taxes — which they always want to do regardless of circumstances. If Mr. Obama comes back for a second round of stimulus, they’ll respond not by being helpful, but by claiming that his policies have failed.
And I laid out the following scenario:
So here’s the picture that scares me: It’s September 2009, the unemployment rate has passed 9 percent, and despite the early round of stimulus spending it’s still headed up. Mr. Obama finally concedes that a bigger stimulus is needed. But he can’t get his new plan through Congress because approval for his economic policies has plummeted, partly because his policies are seen to have failed, partly because job-creation policies are conflated in the public mind with deeply unpopular bank bailouts.
It’s only June, but Republicans are already claiming that the Obama economic plan has failed. (Yes, that’s insane — hardly any of the money has flowed to the economy yet — but this was predictable.) Meanwhile, unemployment is already above 9 percent. And the green shoots are looking browner by the week, especially on the jobs front: new claims for unemployment insurance are stubbornly running at more than 600,000 a week, far above the 350,000 or so that would be consistent with a stable unemployment rate.
We really do need a bigger stimulus. But it’s going to be hard slogging.
I understand that last December we thought (wrongly) we had a one-quarter long and not a two-quarter long collapse in the economy and thus that the unemployment rate could be kept from rising above 8%. I understand the (wrong) judgment that Congress would increase and make more effective rather than diminish and make less effective whatever stimulus program bid Obama put on the table. But what I don't understand is the failure to understand that a too-big fiscal boost package could be neutralized by the Federal Reserve's raising interest rates while a too-small package could not be further boosted by the Federal Reserve's lowering interest rates, and hence that prudent policy last December involved at least planning for a fiscal boost package that would then look very large indeed.
Remember: World War II-style deficit spending was needed to get the unemployment rate down from 10% to 3%, suggesting to me at least that a truly effective fiscal boost capable of doing half that would have to be a quarter to a third of large. And we are not there: we are far from there: