Sunday, October 24, 2010

Nobel Economists Krugman, Stiglitz: U.S., Britain Should Favor Stimulus Over Austerity

The Congressional Budget Office estimates that the stimulus package created between 1.4 million and 3.3 million jobs. Shortly after its passage, analysts from various perspectives conceded that it was working. Regardless, we haven't had a second package for political reasons. The Republicans argue that it was wasteful, regardless of their hypocritical use of stimulus money. The Republicans call for deep spending cuts–and for the extension of Bush tax cuts for the wealthy, which would add $700 billion to the debt over the next decade. For the ever-cautious Democrats, there is a debate on the stimulus package:

For decades, Keynesian policies, which call for government spending to make up for the shortfall in private-sector demand during an economic downturn, have been a central element of the Democratic tool kit... But the unpopularity of the stimulus package signed into law by President Obama has left many Democrats in competitive races distancing themselves from such programs, raising questions about whether the party is beginning a more fundamental rethinking of its approach to the economy.

...And yet, a spate of recent research from the Congressional Budget Office, Wall Street banks and independent economists has documented that the stimulus, while imperfect, helped avert greater job losses and a greater drop in economic output.

Conservative British Prime Minister David Cameron has joined the European trend away from Keynesian economics. Nobel-Prize-winning economists Paul Krugman (left) and Joseph Stiglitz criticize austerity and favor continued stimulus. In advocating this solution, Krugman also emphasizes the inadequacy of the stimulus package and criticizes the British budget: is possible — indeed, necessary — for the nation as a whole to spend its way out of debt: a temporary surge of deficit spending, on a sufficient scale, can cure problems brought on by past excesses.

...Actually, the [Obama] administration has had a messaging problem on economic policy ever since its first months in office, when it went for a stimulus plan that many of us warned from the beginning was inadequate given the size of the economy’s troubles.

...The British government’s plan...goes in exactly the wrong direction. It would cut government employment by 490,000 workers — the equivalent of almost three million layoffs in the United States — at a time when the private sector is in no position to provide alternative employment. It would slash spending at a time when private demand isn’t at all ready to take up the slack.

Joseph Stiglitz (left) also states that the Obama administration didn't go far enough with the stimulus–and that the British are on the wrong path:

In the US the stimulus was both too small and poorly designed – 40% of it went on household tax cuts, which were known not to provide much bang for the buck – and yet unemployment was reduced from what it otherwise would have been – over 12% – to 10%.

...Britain is embarking on a highly risky experiment. More likely than not, it will add one more data point to the well- established result that austerity in the midst of a downturn lowers GDP and increases unemployment, and excessive austerity can have long-lasting effects.

...Austerity is a gamble which Britain can ill afford.

Krugman reaches two conclusions about today's deficit hawks in respectively, Britain and the U.S.:

Why is the British government doing this? The real reason has a lot to do with ideology: the Tories are using the deficit as an excuse to downsize the welfare state. But the official rationale is that there is no alternative.’s slightly sickening to realize that the big winners in the midterm elections are likely to be the very people who first got us into this mess, then did everything in their power to block action to get us out.


carlos9900 said...

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Keep up the good job!

Jeff Tone said...

Thanks, Carlos. Glad to help!