Sunday, January 11, 2009

Multiple Ways to Fear the Recovery Plan

I recently read Paul Krugman's and David Brooks' most recent columns and was left feeling rather uncomfortable about Obama's approaching recovery package. (First, a quick note: Brooks has partially redeemed himself with this strong article after his previous abomination on the conflict in Gaza. Perhaps things just fall apart for David when he looks outside of the US border.) 

Anyway, this week, Brooks gave compelling evidence to suggest why Obama may be overconfident in his ability to time and allocate the recovery spending correctly. He thinks Obama is taking on too much -- promising to forward every policy goal without focusing on any one thing. In addition, the bill is going to be ultra-complex in written form, which poses problems for getting it passed through a Congress of 435 seperate interests.  

On the other hand, Krugman (and others like John Judis) reveals doubt over the recovery package for exactly the opposite reasons. "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." According to this analyst, Obama's $775 billion plan will not cover the projected $2.1 trillion loss in production. Even worse, only 60% of the plan is public spending; the rest is tax cuts, which isn't as likely to cover the gap in production. The result could be an underachieving plan that prevents a deeper economic crisis.

These two essays, taken together, present severe pessimism for this plan. One perspective thinks expectations are too high. The other predominant view says the bar is set too low. But even if the economic plan can get past obstacle #1 (it passes Congress without much delay and is implemented without mistakes), then the package faces the daunting reality that it may only be half the size it needed to be in order to save the US from a deeper recession.    

The reality is that there is almost widespread consensus among economists (a rare moment in history) that a large spending plan is needed to fend off the next Depression. So as reasoned as Brooks' argument for political expectations is, an unprecedented spending bill is coming through the Congress. Brooks' concerns -- insofar as solutions to the problem go -- are irrelevant. 

Therefore, only the "underperformance" concern remains, and the solution becomes clear. Obama must step up spending significantly. Double his plan's size or more -- $1.5-$2 trillion would be the in the ballpark. And if such big numbers make you nervous, just remember that the Great Depression was just a recession at first -- until FDR failed to spend enough.


1 comment:

  1. I agree with your summary that we will probably need to double the "investments" to completely get the economy going. I believe Obama and the pundits have left this matter open as to adding more spending. Let us hope the initial spending changes the economic direction or at least peoples confidence in the direction.