Friday, January 09, 2009

Paul Krugman writes about Obama's Plan

Professor Krugman writes about how President-elect Obama’s prescription for the economy
doesn’t live up to his very accurate diagnosis.

In his editorial "The Obama Gap" argues that the plan as it is being leaked out is not big enough. He points out that with how big the U.S. economy is, there cannot be these half measures. If half measures are used the current economic crisis could too easily turn into a prolonged slump. I have to agree that the economic plan Obama’s offering isn’t as strong as his language about the economic threat.

Here is a snippit of the editorial:

To close a gap of more than $2 trillion — possibly a lot more, if the budget office projections turn out to be too optimistic — Mr. Obama offers a $775 billion plan. And that’s not enough.

Now, fiscal stimulus can sometimes have a “multiplier” effect: In addition to the direct effects of, say, investment in infrastructure on demand, there can be a further indirect effect as higher incomes lead to higher consumer spending. Standard estimates suggest that a dollar of public spending raises G.D.P. by around $1.50.

But only about 60 percent of the Obama plan consists of public spending. The rest consists of tax cuts — and many economists are skeptical about how much these tax cuts, especially the tax breaks for business, will actually do to boost spending. (A number of Senate Democrats apparently share these doubts.) Howard Gleckman of the nonpartisan Tax Policy Center summed it up in the title of a recent blog posting: “lots of buck, not much bang.”

The bottom line is that the Obama plan is unlikely to close more than half of the looming output gap, and could easily end up doing less than a third of the job.

Why isn’t Mr. Obama trying to do more?

Read the whole editorial here.

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