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The Obama Gap
“I don’t believe it’s too late to change course, but it will be if we don’t take dramatic action as soon as possible. If nothing is done, this recession could linger for years.”
So declared President-elect Barack Obama on Thursday, explaining why the nation needs an extremely aggressive government response to the economic downturn. He’s right. This is the most dangerous economic crisis since the Great Depression, and it could all too easily turn into a prolonged slump.
But 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.”
Earlier this week, the Congressional Budget Office came out with its latest analysis of the budget and economic outlook. The budget office says that in the absence of a stimulus plan, the unemployment rate would rise above 9 percent by early 2010, and stay high for years to come.
Grim as this projection is, by the way, it’s actually optimistic compared with some independent forecasts. Mr. Obama himself has been saying that without a stimulus plan, the unemployment rate could go into double digits.
Even the C.B.O. 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.
Now, fiscal stimulus can sometimes have a “multiplier” effect: In addition to the direct effects of, say, investment in infrastructure on demand, there can be a further indirect effect as higher incomes lead to higher consumer spending. Standard estimates suggest that a dollar of public spending raises G.D.P. by around $1.50.
But 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?
Is the plan being limited by fear of debt? There are dangers associated with large-scale government borrowing — and this week’s C.B.O. report projected a $1.2 trillion deficit for this year. But it would be even more dangerous to fall short in rescuing the economy. The president-elect spoke eloquently and accurately on Thursday about the consequences of failing to act — there’s a real risk that we’ll slide into a prolonged, Japanese-style deflationary trap — but the consequences of failing to act adequately aren’t much better.
Is the plan being limited by a lack of spending opportunities? There are only a limited number of “shovel-ready” public investment projects — that is, projects that can be started quickly enough to help the economy in the near term. But there are other forms of public spending, especially on health care, that could do good while aiding the economy in its hour of need.
Or is the plan being limited by political caution? Press reports last month indicated that Obama aides were anxious to keep the final price tag on the plan below the politically sensitive trillion-dollar mark. There also have been suggestions that the plan’s inclusion of large business tax cuts, which add to its cost but will do little for the economy, is an attempt to win Republican votes in Congress.
Whatever the explanation, the Obama plan just doesn’t look adequate to the economy’s need. To be sure, a third of a loaf is better than none. But right now we seem to be facing two major economic gaps: the gap between the economy’s potential and its likely performance, and the gap between Mr. Obama’s stern economic rhetoric and his somewhat disappointing economic plan.
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22 Comments so far
Show AllObama is trying to govern from the middle after 40 years of government steered by reactionary right-wing types. Ain't gonna work. BushCo set out to destroy the government, and they've largely succeeded. In fact they've destroyed the USA as we once knew it. They wanted rule by a global corporatocracy and by breaking the public mechanism of government, they've succeeded.
If we don't hold the Democrats' feet to the fire, progressives' worst fears may be about to be realized. We knew Obama was not progressive, as much as we may have wanted to believe it. Let's get more control of the discourse -- radio, print, internet, tv, etc.
Or we could just resign ourselves to a kind of wage slavery where we don't have to think or act with much consequence. Power is banking on our apathy and entropy.
Democrats have feet of clay and holding them to the fire will accomplish nothing.
Hmm.... Won't it harden them into pottery?
Krugman sez: "There also have been suggestions that the plan’s inclusion of large business tax cuts, which add to its cost but will do little for the economy, is an attempt to win Republican votes in Congress."
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Hmm. So, the USAn voters installed a Democrat in the White House and increased Democratic majorities in both houses of congress in an overwhelming repudiation of neofascism, thereby putting the tiller of the ship of state firmly in that party's hands.
Yet it seems the regressives and their patrons remain in their job as navigator of said ship.
I sure 'Hope' this 'Change' is going to soften up those rocks looming over the bow. Because 'Yes we Can' run aground on them.
This is the most dangerous economic crisis since the Great Depression, and it could all too easily turn into a prolonged slump.
This is exactly what the Republicans want. It will give them the opportunity to destroy what little is left of oraganized labor and send the nation into a complete panic. Then comes a sustained campaign of vilification of Obama which they believe will bring them back into power so they can place a pillow over Uncle Sam's head and press down hard until all breathing has ceased.
Thank you, Mr. Krugman. Beside William Greider, you're the only other person whose writing about economics I can actually understand.
I agree. And Obama is playing right into their hands by trying to please those who will never include him in their club anyway. Why is he not insisting that he will demand accounting for the first hundreds of billions? It boggles the mind. Sad for all of us. Unless we stop it.
Joe
If Obama doesn't stop the bleeding of jobs, the sunbsidizing of offshoring, restore and protect our manufacturing......if he doesn't protect the American worker from unfair and illegal competition, it won't make any difference what they spend.
And I must agree with Mr. Krugman, Obamas plan as stated is not that good. Hopefully it will change.
There is a simple solution to unfair foreign wage competition. Any nation which DOES NOT ALLOW FREE UNION ORGANIZING pays full tariff. That is the organizing principle of the European Union. There should also be a tariff penalty for lack of democracy, since fascist countries such a China do not pay environmental, health and social costs as part of their labor bill. Again the lesson of Europe. Greece, Spain and Portugal could not get into the customs' union until they had elections.
It is not necessary to invade anyone to foster democracy. All we have to do is withhold our free market from fascists, and in the meantime we would recover our manufacturing industries. It's not so far fetched. NAFTA is supposed to have a free labor clause. It just isn't enforced. Will the unions start a campaign? We'll see.
You are probably aware that last year, because of domestic pressure, the Chinese attempted to institute wide-ranging and significant labor reforms, increasing wages and setting standards. However, a group of US corporations with manufacturing plants in China threatened the Chinese government that they would close their factories and engage in other retaliatory behavior if the Chinese dared to improve the labor conditions of their workers. The Chinese government backed down and seriously watered down the measures. I would be willing to bet that some or all of such corporations have supported US political candidates who have demonized China based on its labor conditions as well as other factors.
We in the US are in the belly of the beast.
Good point, kivals.
There are certainly differences in the USAn and Chinese political systems. But Chinese 'communism' and US 'democracy' are both subservient to a nearly identical economic model ... under the same masters.
Mr. Obama can choose insufficient stimulus and a prolonged recession and possible depression or sufficient stimulus that could trigger hyper-inflation and a precipitous fall of the dollar, with a resulting depression. Regardless of how he chooses, the USA is broken and capitalism is broken and no amount of "adult supervision" will fix it.
Any system that rewards the unprincipled, the self-interested, and the amoral -- those who spend no time worrying about the fate of the planet, the human race, or the society in which they live but only work to maximize the welfare of those in their own small circle, generally only for the short-term -- is doomed to self-destruction. The conscientious, caring, and altruistic are always at a disadvantage and they get weeded out in capitalist systems, and the unprincipled, predatory, and ruthless always have an advantage and are usually rewarded. And over time, under these pressures, the system evolves into something more and more self-destructive until it collapses when all the predatory activities can no longer provide enough sustenance given all the conflict and waste.
World fascism, world socialism, and human extinction are the three possible futures we face. The great majority of those with power in the USA would push for the first alternative, while risking the third to avoid the second, so maybe it is for the best that the whole stinking ship sinks into the abyss.
"The conscientious, caring, and altruistic," had best stop complaining and learn how to organize. Organize unions, neighborhoods, schools, homeless people: wherever you are. Do you think that socialism is some abstract system? No friends, socialism is the sum total of human cooperation. Some day it may outweigh the total of human selfishness. (on a more day to day level, emotional narcissism) The missing link between animal and human has been found. It's us. And is up to all of us to work on it.
All of the above! As the Mogambo Guru says at AsiaTimes.com, again and again, "We're doomed!"
You know this when some economists are advising to NOT buy gold stocks but to buy gold, or stock up on canned goods or other "non-perishables."
Another sign is that for at least the past year no economist has been able to say whether we face inflation or deflation or first one and then the other or both (selectively) at the same time. How do you plan for an unknown?
-30-
The basic problem with American business is that it has relied since 1945 on the profit-rich intravenous feed of government purchasing. Business does not keep its doors open to collect the nickel from the random customer, but to collect the unending stream of dollars from government contracts. This has finally turned into a case of morbid obesity with coupled with potentially fatal diabetes in the American business community. Obama’s diagnosis appears to me to be a massive of infusion of raw sugar. That ought to do something….
The $30 Trillion figure Krugman states at top includes lots of unproductive crap like tainted financials and weapons that shouldn't be included as "goods and services." This in turn makes the "gap" figure different and smaller. As for spending cuts, I know where over one trillion can be made available almost overnight: pull the plug on ALL aspects of the US Empire, foreign and domestic. Another related problem is the massive amount of waste in the US economy that exists at many different levels and acts like water being evaporated from an irrigation canal: 10 acrefeet of water enters the canal, but only 6 acrefeet gets to the plants. (The 40% in the example is quite close to reality; so, even with weapons and junk financials included, 40% of Krugman's 30 Trillion, or 12 Trillion, is waste.)
As for unemployment, the situation is already dire with total unemployment (BLS "U6" as shown here) rapidly closing in on 14%, with a more inclusive metric showing almost 18%. Also note the almost verticle slope of the curves, which indicate to me that the real crash is still coming. I'm willing to predict the U6 measure will top 20% before July 4. And the positive feedback loop this massive and rapid increase in unemployment will trigger yet more layoffs and business failures.
The initial folly was allowing the banksters to steal 750 Billion instead of immediately channeling those monies to homeowners and small businesses. We are starting to feel the effects of that now. Next we will see the start of an ever increasing cascade of defaults on a wide variety of government bonds as the revenue streams used to pay the interest dry up. All the while it should be emphasized that it's the policies promoted by the Reaganites, Norquists, Bushites, and Clintonites that caused this economic fiasco.
How large a fiscal stimulus is needed just to get ourselves going in a positive direction? 4 Trillion annually for 4 years minimum to be spent on new types of electrical power generation; universal health care; infrastructure revitalization; veteran rehabilitation; nationalization, electrification and expansion of the rail system; reformulation of the nation's agricultural and food distribution systems; and a humane housing program that destroys both homelessness and gentrification. At the same time we must dismantle most US domestic military bases and retool ALL weapons manufacturers, while legally mandating the goal of ALL corporations to promote people and the environment over profis and shareholders. Oh yes, making ALL media outlets publicly owned and instituting publicly financed elections at all levels.
Of course, in the months to come, none of the above will be done. Why? Because Obama and Congress as a whole are followers of those who caused the economic meltdown, and are servants of Empire and the banksters in the first place.
EXCELLENT! Well put. Thank you. I think we all should start familiarizing ourselves with Orlov's book "Reinventing Collapse". It ain't a pretty picture.
Why not give the money directly to the people instead of to those who gambled it away?
TAX THE RICH. Repeal the REAGAN giveaways.
How to create jobs and stimulate the economy without running up so much debt that the currency crashes? It is embarrassing that a nobel prize economist REFUSES to see the obvious. Borrowing trillions (from the Chinese?) will only work for a few years, after which the deficit must be paid down by taxing the rich. The plutocrats, of course, tell us that raising anyone's taxes will contract the economy further. Nonsense! A person making 20 or 30 thousand a year spends all of it. Someone who makes over a million spends only a third or a fourth of their income. (I get these proportions from sales tax records in Washington State.) So if you tax a millionaire and use the money to create working class jobs you greatly increase spending and economic stimulation. Paul Krugman knows this! So why is he only talking about borrowing for stimulus?
And it is not the Bush tax cuts that must be repealed, but the REAGAN tax cuts as well.
Reagan cut the income tax rate on the super rich from 70% to 28%. (Hoover's rate was 25%) And now we have the sorry spectacle of Obama dithering about when to restore the Clinton rate of 39%, up from Bush's 35%.
Every economist knows the story of metastasizing American inequality. In 1970 the average CEO made about 30 times the income of the average worker. Now the ratio is about 400 to one. It is this inequality, both economic and political, which has destroyed our present economy. When working people don't have enough money to buy a decent life they borrow, and when the borrowing runs too high, you have a "credit crisis," made worse by the power of the rich to eliminate financial regulations. (cf. Robert Reich at http://www.prospect.org/cs/articles?article=the_hardest_lesson )
This year, perhaps, a debt and spend program may be all that is politically possible. But after that, Mr. Obama needs to be told, to counteract the Larry Sommers types, that the economic crisis cannot be solved without reducing inequality, at the very least below the pre-Reagan level. Otherwise, either debt will destroy the dollar, or a reduction in spending will precipitate a double dip in recession, as in 1937. How about it, Mr. Krugman? Will you say what you know? Or will intimidation by the establishment outweigh your knowledge and intelligence? This crisis could be an opportunity to restore the possibility of some economic and political democracy. But you have to speak out.
Re-arranging deck chairs on the Titanic (which is what the plan is) takes people's minds off of the cold dark water approaching the deck. Nothing wrong with that...but it won't really change the ending. We live in a civilization which is unsustainable because it is based on non-renewable energy sources. About one third of the people on the Titanic survived. With renewable energy sources we might be able to have one third of the world's current population. Or we may not. We definately will find out within the next several decades.
Much as I have a good deal of respect for Krugman, he should not be permitted to resort to a lack of truthiness of Cheney-esque proportions.
The assertion that a $1 increase in government spending leads to a $1.50 increase in GDP is absolute BULLSHIT - or it is a call for slavery (since, obviously, if GDP was 100% Government Spending, GDP would increase by 1.5*(GDP-G) where G is current government spending.)
And you can go further: if Krugman's claims aren't bullshit, then every budget deficit would be able to be paid - with interest - out of the additional production. Thus, the output-maximising economic configuration would involve infinite deficits, since the cost of a deficit is r (the interest rate) and the return on a dollar of deficit expenditure is 50%. the optimal thing to do is to run ever-increasing deficits until the marginal rate of return on government spending (which starts, let's recall, at 50%) is equated with the rate payable on government debt (currently 3%-ish for 30-year debt, but that would rise as the market repriced bonds).
What a load of horse-shit: it so obviously fails the most basic smell test. If it were true, then Argentina, Zimbabwe and the Soviet Union would be economic powerhouses.
The US economy is infested with about a third of the parasites that the Soviet Union suffered, and it (the US crony system) has lasted significantly longer.
To make it last longer still, GET RID OF THE PARASITES. Make the vermin from Mordor on the Potomac actually find productive jobs rather than living parasitically from taxes extorted from the populace.
Cheers
GT
GT's Market Rant
What would you substitute for taxation? And how would your local government operate without taxes? How would your local small enterprise owners operate without government? These are your friends and neighbors, not parasites. What sort of equitible economy would you construct for your locale that integrates into the larger sociopolitical-economy, and how would you maintain the equitability of the larger entity?
Getting rid of the "parasites" is the easy part. We are humans, so we can expect deviance even within utopia. Or perhaps lust and greed will evolve out of human nature at some point in the near future. I'm certainly not defending "Them." I just want to show there's more to do than settle the score, and that it's more difficult.
Today Obama said, "If you have a solution, show me"
Well we can definitely show you Mr. Obama, in fact WE'LL SHOW EVERYBODY!!!
http://www.americanrhetoric.com/speeches/hueyplongshare.htm