Friday, October 2, 2009

Do We Need Another Stimulus?

The technical end of the recession may have arrived, but there is still a lot of healing that has to take place before we should proclaim an end to the economic crisis. The loss of economic productivity from 2010-2013 could add up to trillions of dollars, which is one reason Paul Krugman argues that we can't afford to not have another stimulus. See the following from Economist's View for more.

If we don't do more to promote recovery, the human and economic costs will be large:

Mission Not Accomplished, by Paul Krugman, Commentary, NY Times: Stocks are up. Ben Bernanke says that the recession is over. And I sense a growing willingness among movers and shakers to declare “Mission Accomplished” when it comes to fighting the slump. It’s time, I keep hearing, to shift our focus from economic stimulus to the budget deficit.

No, it isn’t. ... Yes, the Federal Reserve and the Obama administration have pulled us “back from the brink” — the title of a new paper by Christina Romer, who ... argues convincingly that expansionary policy saved us from a possible replay of the Great Depression.

But while not having another depression is a good thing, all indications are that unless the government does much more than is currently planned..., the job market ... will remain terrible for years to come. Indeed, the administration’s own economic projection ... is that the unemployment rate ... will average 9.8 percent in 2010, 8.6 percent in 2011, and 7.7 percent in 2012.

This should not be considered an acceptable outlook. For one thing, it implies an enormous amount of suffering over the next few years. ... John Irons of the Economic Policy Institute ... points out that sustained unemployment on the scale now being predicted would lead to a huge rise in child poverty — and that there’s overwhelming evidence that children who grow up in poverty are alarmingly likely to lead blighted lives.

These human costs should be our main concern, but the dollars and cents implications are also dire. Projections by the Congressional Budget Office, for example, imply that over the period from 2010 to 2013 — that is, not counting the losses we’ve already suffered — the ... difference between the amount the economy could have produced and the amount it actually produces, will be more than $2 trillion. That’s trillions of dollars of productive potential going to waste.

Wait. It gets worse. A new report from the International Monetary Fund shows that the kind of recession we’ve had, a recession caused by a financial crisis, often leads to long-term damage to a country’s growth prospects. ...

The same report, however, suggests that ... a temporary increase in government spending — “is significantly associated with smaller medium-term output losses.”

So we should be doing much more than we are to promote economic recovery, not just because it would reduce our current pain, but also because it would improve our long-run prospects.

But can we afford to do more...? Yes, we can.

The conventional wisdom is that trying to help the economy now produces short-term gain at the expense of long-term pain. But as I’ve just pointed out,... that’s not at all how it works. The slump is doing long-term damage to our economy and society, and mitigating that slump will lead to a better future.

What is true is that spending more on recovery ... would worsen the government’s own fiscal position. But even there, conventional wisdom greatly overstates the case. The true fiscal costs of supporting the economy are surprisingly small.

You see, spending money now means a stronger economy, both in the short run and in the long run. And a stronger economy means more revenues... Back-of-the-envelope calculations suggest that the offset falls short of 100 percent, so that fiscal stimulus isn’t a complete free lunch. But it costs far less than you’d think from listening to what passes for informed discussion.

Look, I know more stimulus is a hard sell politically. But it’s urgently needed. The question shouldn’t be whether we can afford to do more to promote recovery. It should be whether we can afford not to. And the answer is no.
This post has been republished from Mark Thoma's blog, Economist's View.
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