Failure to Enact Bigger Stimulus Was Fatal Mistake

As expected, the Democrats took big losses in the midterm Congressional
elections on Tuesday, holding on to the Senate but losing the House. It
is typical for the party of the President to lose some seats in midterm
elections, and it is doubtful
that this election result represents the beginning of another
conservative era. But the Democrats' losses were big by any measure.

The
overwhelming reason for the Democrats' losses was their failure to take
the necessary measures to ensure a robust recovery from the recession.

This
is a case where it clearly would have been better to fight for
something that you want, and lose, than fight for what you don't want,
and win. Had the Democrats fought for a stimulus large enough to move
unemployment to more normal levels over two years - and lost the battle
in Congress - they would at least have a case that they tried and were
stymied by the Republicans.

Of course, the Republican mantra
that the American Reinvestment and Recovery Act of 2009 act didn't do
anything but pile up debt is sheer nonsense. The non-partisan
Congressional Budget Office has estimated that between 1.4 and 3.3 million more people were employed by mid-2010, because of the stimulus.

But it was not enough. As my colleague Dean Baker has pointed out,
the federal stimulus - after subtracting the state and local government
budget tightening - amounted to about one-eighth of the private demand
that our economy lost from the bursting of the real estate bubble.

The
economy is always an important issue in national elections, but seldom
more important than it is today - with 9.6 percent unemployment,
millions more underemployed or dropped out of the labor force, and
millions of Americans losing their homes. But our politics today - year
round, not only during election season -- is based primarily on
manipulating voters through media and advertising, rather than trying to
explain even a minimal amount of substance to them.

The
Democrats would have done better by telling the truth from the
beginning: not only that they inherited this mess but explaining that it
would take a huge amount of government spending to restore full
employment. Enough to make up for the private spending that was lost.
And that the alternative was - well, we are looking at it. This is not
rocket science.

The irony is that our economy remains in a
situation where we could spend this money without even adding to the
public debt burden. This may seem like magic but it is not. When the
economy is this depressed, with high unemployment and unused capacity,
the Federal Reserve can create money and loan it to the Treasury - and
such money creation does not cause any problem of inflation. In fact,
since 2007, the Fed has created more than $1.4 trillion and used it to
buy mostly mortgage-backed securities from Fannie Mae and Freddie Mac.
But inflation is still running at just 1.1 percent annually - a level
that is too low, even for the Fed.

Now the Fed is talking about
creating more money and using it to buy long-term Treasury bonds. Since
the interest on these bonds will return to the treasury, there is no
cost to the taxpayer. This money creation can be - and could have been -
used to finance enough job creation so that there would be no question
about our economic recovery.

By failing to stimulate economic
recovery, the Democrats gave Republicans a populist card on a platter,
which the Republicans played, with pitchforks held high and torches
blazing. With unemployment and economic insecurity generating mass
anger, the Republicans paid little price even for extremist excesses. In
this election, the Democrats' one big mistake on the economy outweighs
any others.