Thursday, July 9, 2009

Stimulus Promoting Paul Krugman Will Never Make A Good Fire Chief

With unemployment at its 26 year high at 9.5 percent, there is a call by Paul Krugman and a chorus of economists for a second stimulus spending program. However, only about 10 percent of the first $787 billion stimulus is spent with the remaining 90 percent to be spent over the next few years. To be fair, Krugman originally called for a much larger first stimulus package with more spending than tax cuts. Krugman is really just asking for his first proposed stimulus plan.

Krugman and the other economists have an idea as to how many stimulus dollars under Keynesian economics is needed to promote economic recovery. They are like firefighters that know how much water they need to put out a house fire. However, Krugman and the stimulus promoting economists complain about the political process, the political compromises in the stimulus bill between democrats and republicans, the design and dollar amount of the stimulus package. They disregard political reality.

The economists ignore, that like firefighters that need to get the water to the fire, government stimulus spending programs must go through the politics of the legislative process to become law. Legislation requires compromises, agreeing to do things outside of the original bill's purpose and concept, and the very real possibility of a much smaller effort that originally requested.

Proposing a stimulus plan as a cure for economic ills is to accept the delays, politics and political compromises that are part of all new legislation. However, Krugman sees Keynesian stimulus as a platonic ideal unfettered by the reality of the political process.

Even if one is a believer in Keynesian stimulus spending, the textbook weakness of this approach to economic problems is the political reality of delay, compromises, economically unnecessary modifications to the original program, bureaucracy, etc.

Krugman is like a fire chief who wants a lot of water at a fire to put it out, but fails to consider the limitations of the methods of getting the water to the fire. There is a budget for just so many fire trucks and firefighters. Fire hydrants, fire hoses and water trucks can only deliver so much water at a time. In some situations, more water is needed than can be realistically delivered. Fire chiefs plan for those contingencies as part of their original fire fighting plans and drills. Krugman just fights the politically reality with rhetoric and he offers no plan for the very real world situations involved in passing stimulus packages. That only 10 percent of the first stimulus package is spent and the fact that the first plan is much smaller and different than Keynesian economists suggested is no surprise and was well known and expected at the time of the original proposal. It is just political reality and the well-known limitation of Keynesian economic stimulus. Unfortunately, Krugman does not seem to factor the political process reality of stimulus spending into his economic rhetoric, modeling and thinking.


See Paul Krugman's July 10, 2009, NY Times piece, "Economists oppose more stimulus?", calling for another stimulus package.

No comments:

Post a Comment