Paul 'It's Never Enough' Krugman Strikes Again: Stimulus Inadequate, Shouldn't Have Tax Cuts

January 9th, 2009 1:01 PM

KrugmanFromNB0109Nobel laureate on arcane trade matters, former Enron adviser, and New York Times columnist Paul Krugman is at it again.

In his latest Times column ("The Obama Gap"), he chides President-elect Barack Obama for not being ambitious enough in his stimulus plan, and, heaven forbid, for including tax cuts in the mix. He complains that Obama is only committing to much less than half of what's necessary.

Brace yourself:

..... 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.”

..... Even the C.B.O. (Congressional Budget Office) 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.

By advocating that the package consist only of government spending, Krugman is, in essence, advocating that the federal government take over about 7% of the economy by fiat.

Of course, Mr. State Knows Best is also upset that tax cuts are currently part of the Obama stimulus mix:

..... 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?

Contrary to Krugman's belief, Obama isn't doing enough tax-cutting.

As usual, Krugman misses the crucial impact of tax cuts' on investors' and entrepreneurs' decisions to take risks in general and to make investments in capital goods. Investments made in these areas in response to across-the-board or investment-targeted tax cuts have jump-started the economy faster than government "stimulus" ever has at least five times in the past 90 years: The Roaring 1920s, under Coolidge; the early 1960s, under Kennedy; the late-1980s and early 1990s, under Reagan and Bush 41; the late-1990s capital gains cut, under Clinton; and the 2001 and 2003 cuts, under Bush 43.

But all the historical examples in the world won't move Paul Krugman and others from their government-knows-best New Deal Era mindset, never mind that government stimulus was tried, and failed to pull the country out of the Great Depression. World War II did that.

Cross-posted at BizzyBlog.com.