The Conscience of a Cassandra
It's hard not to give considerable weight to Paul Krugman's endlessly repeated warnings -- and complaints once the warnings went unheeded -- that the Feb. 2009 stimulus was too small. In this narrative, the cautious trimming that led Obama to put forward a proposal too weighted to tax cuts and appropriating less than 2/3 the total originally recommended by Christina Romer failed to jump-start true recovery and thus destroyed Obama's political capital.
Can being right too often be hazardous to your intellectual health? Krugman warned us from Feb 2000 forward about the voodoo math behind the Bush tax cuts; he warned in 2005 about the housing bubble; he warned from February 2009 forward that the proposed stimulus was too small. [Update: He was also right about the the Iraq war and the Euro.] Being right and unheeded creates a Cassandra syndrome: you prophesy, and you feel in your bones that the leadership won't listen. Hence Krugman slips in Glenn Greenwald mode -- concocting a simplified counterfactual in which, under his policies, everything would have been okay, whereas current policy is leading straight to disaster.
As a symptom, take this sideswipe at the stimulus in Krugman's latest crie de coeur about the Fed's refusal to raise its inflation target:
...fearing opposition in Congress, the Obama administration offered an inadequate plan, only to see the plan weakened further in the Senate. In the end, the small rise in federal spending was effectively offset by cuts at the state and local level, so that there was no real stimulus to the economy.
Wasn't one of the core purposes of the stimulus to offset spending cuts by state and local governments? That's what stimulus does -- offset drops in demand. Of course, Krugman believes that there was too little state aid, along with too little of everything, in the Recovery Act, and naturally a stimulus should do more than offset other government spending cuts. But still, offsetting those cuts is a "real stimulus to the economy." The Recovery Act unquestionably preserved hundreds of thousands of state and local government jobs, and GDP would have been lower if this hadn't been done.
This may seem a semantic quibble. But it's a symptom, I think, of an oversimplified narrative. Krugman has implied elsewhere that the right-sized stimulus would have set the economy roaring back to life (as has Martin Wolf). To what degree is that credible? If Obama had asked for $1.2 trillion and got $950 billion, what's the math on the counterfactual? Unemployment at 8.3%? And the effect of such a drop on the electorate? I confess it could be substantial. But there's an awful lot of what-ifs there, beginning with the premise that a substantially larger stimulus could have got through the Senate. And the narrative leaves out some externalities, such as the Euro sovereign debt crisis, which seemed to stop a decent-looking recovery in its tracks. Not to mention the credible possibility, forecast now by a growing number of economists and business leaders (e.g., here and here), that a substantial recovery may be on the horizon now.
Krugman's critique of the Obama administration has real bite. But neither he nor anyone else knows what would have been, what will be, what the full or long-term effect of the Recovery Act will be, or what the effect of a Krugman-designed stimulus (passed through the Congressional wringer) would have been.
UPDATE: With respect to Obama, Krugman came around in 2012