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Home Publications Blogs Beat the Press Ezra Klein on the Stimulus and After

Ezra Klein on the Stimulus and After

Sunday, 09 October 2011 13:32

Ezra Klein has a seriously researched piece in the Post on why the stimulus was inadequate and what else could have been done. The major item missing in my book is any discussion of the overselling of the stimulus after its passage.

By all accounts, Obama's economic team knew that the stimulus they got through Congress was inadequate for the task. They needed a stimulus that was at least twice as large as what Congress passed and quite possibly three or four times as large. Nonetheless, President Obama was quickly running around touting the "green shoots of recovery" and talking about the need to focus on deficit reduction.

By overselling the stimulus and putting deficit reduction at the top of the agenda, Obama was virtually shutting the door on the possibility of getting further stimulus. Since they knew that additional stimulus would almost certainly be necessary, why did they dig themselves into this hole?

It would be interesting to some explanation of this situation. Nonetheless, the piece is well worth reading. The Post deserves some credit for running it.  

Comments (5)Add Comment
written by Ken M, October 09, 2011 3:30
I wrote the comment below on Ezra's post. Perhaps I am misunderstanding your arguments, but I would have thought you would disagree more with the economic analysis he presents (I also agree with you about the overselling, and I wrote another comment about that). Here is what I wrote, I would welcome clarification of your thoughts about this (and thanks in advance):

Also, there are issues with your overall economic analysis. I’m no economist. But Dean Baker argues that the debt overhang is not the problem, as follows. Consumers are saving 5% of income, which is less than the pre-bubble 8%. That is, consumers are spending at normal levels given their income. Businesses have tons of cash they are not spending, so they also are not debt-constrained. The problem, he says, is that during the bubble consumers were saving 0 or negative amounts, and nothing has made up for that lost demand. All that extra demand was used to enable a huge trade deficit. We still have the huge trade deficit sucking up demand. The trade deficit (as a positive number) equals the budget deficit plus the excess of investment over savings, this is an accounting identity. So we have to get the trade deficit down, that is, we have to get a cheaper dollar, otherwise we either have to run huge deficits or, as at present, have inadequate investment. So his prescription is that we have to make the dollar cheaper.
A maybe not so interesting explanation to hear
written by Scott Supak, October 09, 2011 5:36
The explanation seems to be that our centrist president realized that he could get no more stimulus, so he wanted to get out ahead of the Republicans on their own topic so he could show that the only thing they're serious about is beating him in the next election (when they refused his very right-wing proposals).

My granny used to say "kill them with kindness" and "you can catch more flies with sugar."
excellent comment
written by Joe Emersberger, October 09, 2011 8:43
I think that's an excellent comment Ken.

You wrote

"during the bubble consumers were saving 0 or negative amounts"

I'd quibble that you should have put "housing" in front of "bubble" to beat people over the head with the obvious a bit more. People who follow Dean closely would know exactly what you mean but others, unfortunately, would not.

In the short term the US needs stimulus - government spending to make up for the burst housing bubble. Longer term they need a lower dollar / smaler trade deficit.

To clse gap between rich and poor - and bring speculators under controller US needs to

1) Strengthen unions - a cheaper dollar woudl help with that but there are obviously other things that can be done
2) tax financial speculation
3) reform their health care system (plus do a lot of health care related stimulus in the short term)

Yes, the Debt Overhang is Overstated
written by Dean, October 09, 2011 9:41

you're of course right. The big problem is the trade deficit, not the debt overhang. Spending as a percent of income is still relatively high, not low.
written by Mitchell Nusbaum, October 10, 2011 8:42
Izatso, when is your blog to be introduced?

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.