The Economic Crisis is Not Over

When Obama took office the world knew that we were facing an economic crisis, but Obama and his team of experts seemed up to the task. In fact, it was Obama’s cool and composed response to the crisis contrasted with McCain’s weird fumbling that cemented his 2008 victory.

Team Obama lost no time in presenting a clear solution to the problem.  They promised the American people that without action unemployment would rise to 9%, but that if their policies were followed unemployment would peak at just 8%.  And so, in February 2009, American politicians passed the American Recovery and Reinvestment Act of 2009.

Things did not go as planned.

That chart shows unemployment rocketing right past 8%, past 9% and up above 10%.  The rate has since come down to 9.3%, but that’s only because of double- and triple-counting of Census 2010 jobs that aren’t even really worth counting once (because they are temporary).  The economic malaise has also gone global, with Greece as the poster-child for government debt gone bad.  Despite everything that you might hear from the Obama administration, we’re not out of the woods yet.

In fact none other than Obama cheerleader Paul Krugman has come out and declared that not only are things not all roses and ponies, but we’re actually headed for: The Third Depression:

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

The question is: what do we do about it?

Krugman knows the answer, and it’s not cutting government spending.

In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.

Nope, what we need to do is spend more money.  As Krugman puts it “the real problem is inadequate spending.”  Just to be clear here, this is inadequate spending of  money that we don’t actually have.

There are three criticisms of this plan.  The first is that we’ve got to worry about taking debt to such unsustainable levels that we bankrupt the country, the second is that we’ve got to worry about printing so much money that we run the risk of hyperinflation, and the third is that lowering taxes might actually be a better way to stimulate the economy than profligate government spending.

Let’s take these one at a time.

1. Government Debt

Government debt is unsustainable.  This isn’t something you argue about.  It’s something you just occasionally have to remind people of because they would rather ignore it.  Fed chairman Bed Bernanke–reported in the New York Times–recently stated that “the federal budget appears to be on an unsustainable path.”  You think?  The government of Greece is close to default and their bonds are rated as junk.  Nations all across Europe are pulling back on their entitlement spending by raising the retirement age and other “austerity measures”.

Krugman addresses this issue head-on:

The hard-liners often invoke the troubles facing Greece and other nations around the edges of Europe to justify their actions. And it’s true that bond investors have turned on governments with intractable deficits. But there is no evidence that short-run fiscal austerity in the face of a depressed economy reassures investors. On the contrary: Greece has agreed to harsh austerity, only to find its risk spreads growing ever wider; Ireland has imposed savage cuts in public spending, only to be treated by the markets as a worse risk than Spain, which has been far more reluctant to take the hard-liners’ medicine.

All this does is show Krugman’s unwillingness or inability to deal with the real issue.  The problem is not a periodic, short-term episode of high debt.  The problem is long-term and structural.  The real crisis facing America is not the couple of trillion on our books right now, it’s the hidden trillions in unfunded liabilities.

You can’t solve a structural problem without a structural solution, and the European “austerity measures” are about more than fixing their balance sheet for this year.  They are about starting to address the fundamental reality that welfare economies don’t work.

According to, when Social Security was first passed only about half of Americans who lived to age 21 could expect to live all the way to age 65.  By the 1990s this number had risen to nearly 75%.  One realistic way to solve this problem is to increase the retirment age.  When you do this you not only help out your short-term balance sheet, but you structurally reform the way government spending works to bring costs into control for the long haul.

And–as Krugman should know–the long haul matters because even in the short run people base their economic decisions on their expectations for the future.  He’s apparently just so unwilling or unable to do even consider these kinds of fundamental reforms that he doesn’t recognize them when he sees them.

2. Inflation

Krugman addresses inflation too: “governments are obsessing about inflation when the real threat is deflation.”  This is, once again, an example of Krugman’s shortsightedness.  The Telegraph reports on just how much money the Fed is getting ready to print:

Entitled “Deflation: Making Sure It Doesn’t Happen Here“, it is a warfare manual for defeating economic slumps by use of extreme monetary stimulus once interest rates have dropped to zero, and implicitly once governments have spent themselves to near bankruptcy.

The speech is best known for its irreverent one-liner: “The US government has a technology, called a printing press, that allows it to produce as many US dollars as it wishes at essentially no cost.”

Bernanke began putting the script into action after the credit system seized up in 2008, purchasing $1.75 trillion of Treasuries, mortgage securities, and agency bonds to shore up the US credit system. He stopped far short of the $5 trillion balance sheet quietly pencilled in by the Fed Board as the upper limit for quantitative easing (QE).

Once again it’s a good time to take a look at a chart:

Now that’s what I call a hockey-stick graph!  The Fed printed $1.75 trillion dollars (they didn’t literally print physical money, in case you’re wondering), and in doing that they nearly doubled the amount of money in circulation.

And that wast just $1.75 trillion out of a potential $5 trillion Bernanke might be willing to add to the pot.  With pressure mounting from the likes of Obama and Krugman to do something, how much more money are we going to pull out of thin air?

I get that right now deflation is a bigger concern than inflation, but you have to ask yourself if you’re concerned with the next 5 months or the next 5 year or the next 50 years.  Politicians are worried about getting re-elected in a couple of years.  I am worried about the kind of country my children grow up in.  I would rather go through some hard times now then saddle my kids and their kids with trillions upon trillions of debt they will spend their lives laboring to try and pay off.  We’re essentially selling our children’s future to preserve our own standard of living.

3. Taxes vs. Government Spending

First: some macroeconomic theory.  Paul Krugman’s plan is to impose textbook Keynesianism.  Writing for National Affairs, economist Greg Mankiw summarized this theory:

According to Keynesian economics, the business cycle reflects not the wonders of Adam Smith’s invisible hand of the marketplace but rather market failure on a grand scale. Extreme and sustained unemployment during a recession, Keynesians argue, results from a decline in overall (or aggregate) demand in the economy. When the economy is knocked off balance by serious economic shocks, the government can help restore normalcy by increasing demand through government spending. And because the influx of government spending drives businesses to hire and consumers to spend, its impact is multiplied.

Generations of Keynesian economists have sought to model and quantify how that “multiplier” would function in different economic conditions. But most Keynesian economists have agreed that the multiplier effect of government spending is larger than that of the other approach to injecting demand into the economy — cutting taxes — because money from tax cuts might be saved rather than spent.

This notion–that government spending has a greater multiplier effect than tax breaks–is gospel to Keynesians.  The multiplier for government spending is considered to be about 1.57 and the multiplier for tax breaks is considered to be 0.99.  These are the numbers that the Obama administration used to justify the stimulus bill, but recent theory and empirical evidence suggests that numbers are wrong:

In an ironic twist, one key piece comes from Christina Romer, who is now chair of Obama’s Council of Economic Advisers. About six months before she took the job, Romer teamed up with her husband and fellow Berkeley economist David Romer to write a paper (“The Macroeconomic Effects of Tax Changes”) that sought to measure the influence of tax policy on GDP…

The Romers’ conclusion, which is at odds with most traditional Keynesian analysis, was that the tax multiplier was 3 — in other words, that every dollar spent on tax cuts would boost GDP by $3. This would mean that the tax multiplier is roughly three times larger than Obama’s advisors assumed it was during their policy simulations.

So recent work by economists in Obama’s own administration show that the tax multiplier should be 3.0 instead of 0.99.  And the multiplier for government spending?  Recent estimates put the number at 1.4 instead of 1.57.  This means that tax breaks would be more than twice as effective as government spending in stimulating the economy.

But wait, there’s more:

Perhaps the most compelling research on this subject is a very recent study by my colleagues Alberto Alesina and Silvia Ardagna at Harvard. They used data from the Organization for Economic Cooperation and Development to identify every major fiscal stimulus adopted by the 30 OECD countries between 1970 and 2007. Alesina and Ardagna then separated those plans that were in fact followed by robust economic growth from those that were not, and compared their characteristics. They found that the stimulus packages that appeared to be successful had cut business and income taxes, while those that evidently did not succeed had increased government spending and transfer payments.

Mankiw concludes his piece with a quote from Milton Friedman:

As Milton Friedman once put it: “The role of the economist in discussions of public policy seems to me to be to prescribe what should be done in light of what can be done, politics aside, and not to predict what is ‘politically feasible’ and then to recommend it.”

In a time of economic uncertainty and political turmoil, we economists — both in and out of government — could hardly do better than to follow Friedman’s sage advice.

I feel bad for Christina Romer.  She works for the Obama administration now and, in a way, her position is similar to General McChrystal’s.  She may disagree with the Obama administration’s economic plan (it certainly contradicts her own research), but her job is to support her boss.

Paul Krugman has no such excuse.

The take away from this long discussion is as follows.  First of all, brace yourselves for more economic turbulence.  We’re not over this yet, and the one thing I agree with Krugman on is that we might very well be entering another depression.

Secondly, for all that Obama loves to talk about the “failed economic policies of the past”, it’s not like Keynesianism is exactly cutting-edge.  It’s a decades-old economic policy that was largely discredited in the 1970s.  The reason that it is so attractive is that it’s compatible with big-government.  It’s a belief in a centralized, top-down solution to what ails America.

Economic policy is never going to be simple, but that doesn’t mean that common sense doesn’t apply.  We can’t continue to print money without ill-effects.  We can’t ignore the corrosive effect on our political infrastructure of bailouts from the federal government.  We can’t pretend that our looming entitlement debts are a problem that will just go away if we refuse to talk about it.  Any solution to our economic problems has to rise above political partisanship and start to deal with the unpleasant realities that we face.



  1. Gail B. says:

    I would venture to say that if Obama borrowed money in proportion to his income as the amount of the nation’s debt to be repaid on its income, Obama would be squawking loudly!

    You JUST DON’T SPEND money you can’t pay back!!!

    Personally, I am deeply offended that we owe as much as we do and have so little to show for it, but I certainly rest better at night knowing that Pelosi’s rats and Florida’s turtles are safe. Am I the only one who questions whether a turtle has the ability to reason that, unless he USES the tunnels, he’s likely to get run down by a car? Or did his mama teach him to use tunnels?

  2. Gail B. says:

    Or, is there a new government agency in Florida to ensure that turtles use tunnels? Oh, great! Turtle Police! What will they think of next?!

  3. Bet ya can't demise just one says:

    Remember the old potato chip commercial “eat all ya want, we’ll make more”?

    That is this governments philosophy on money…. spend all ya want, we’ll print more. It ain’t working people. My sister from CA insisted we can spend our way out of this recession, so I asked her, how is that working for ya at the state level, there in CA? ha ha ha

    This is Buyon-omics.

  4. Anonymous says:

    What’s happened to the Promised land our founders handed us?

  5. Gail B. says:

    Well, Obama stuck out like a sore thumb at the recent summit. Europe opted to decrease spending and pay off its debt. Yeah, I said EUROPE!!! Judge Napolitano is absolutely up in arms over our governmental spending, the US economy, and the assault on businesses.

  6. John Buyon says:

    excellent article Robert
    but I have a few comments/questions
    1. the unemployment rate jumped much higher than anticipated because of 2 things. the Obama admin had to paint a rosy picture of the future to ensure business and consumer confidence, and since the mortgage and financial instrument markets were so unregulated no one knew how deep this crisis was. ie. all the money for all the people who lost their homes amounts to $1 trillion. we have spent nearly 2.5 trillion on this already because it isn’t a housing problem it is a problem with the structure of neo-liberal capitalism.
    2. the “gospel” of spending multiplier versus tax multiplier is in reality actually a gospel. I cant find the report that points out that tax cuts to wealthy ppl boosts economy more than tax cuts for poor ppl/ Gov’tspending
    and besides the stimulus act was $780 B with $288 billion in tax cuts. thats a lot of tax cuts for a supposed socialist. and besides the MPC for workers and the poor and is much higher than it is for and wealthy people and corporations who would choose to invest their new tax rebates in treasury bills rather than consumption.

    and whether Keynesianism is cutting edge or not, laissez faire wasn’t born yesterday. Any ways chaos would prompt the american people to seriously examine the overarching social, political and economic order reigning over them. I know that I am beginning to draw up some radical conclusions from all this.

  7. Boston Blackie says:

    Watch out people, the VAT is headed our way right after the midterm elections. Of course, Obeyme will try to spin it that HE did not raise taxes, Congress did after his commission recommended it, it’s for the children. He has already warned us of it just a few days ago while at the G20 (wasn’t it the G8 before, why not just call it the G-everyone is invited). He clearly told us to watch out this fall, be prepared for the hard choices he will make. Funny how everything is a crisis but pushed back until after the elections. How long will the admin falsify the unemployment figures with the census workers, again until after the elections. This time we will not be fooled be the hope and change bull, not that I ever was. Then of course the Bush tax cuts expire as of New Years Day, I call that another tax increase. How much longer will he blame Bush for everything including the Limburgh kidnapping.

  8. John Feeny says:

    Thank you, Robert, for this article….I read Krugman’s piece in the Times yesterday while I was waiting for my flight, and two thoughts came to mind: 1) I wondered in what universe his math makes any degree of sense, and 2) I considered standing in front of a landing 747 just so that I could escape the brutal nonsense in which we all live.

  9. kuassa says:

    As a child I grew up in a communist country. A few things stand out tall:

    1. Central planning – each of several 5-year plans overachieved according to the communist government but products and food were missing in the stores.

    2. The waste of government level was incredibly high but the media did not report it – in fact the opposite, slogans were used how well the communist government was doing.

    3. fear of government, communist organizations (such as government controlled Unions) and the Communist Party and its police force.

    4. Constant reminder by the Communist Party and the government of Karl Marx’s term of ‘class warfare’. I see its equivalent in the US as racist fanning the flames of division between Blacks, Whites and Hispanics. Obama is a president who managed to divide America the greatest extent in her history.

    5. Redistribution of wealth – this is again a Karl Marx term from his ‘Das Kapital’ and Obama follows it to the letter. This provides another division between wealthy and the middle class/poor instead of giving the environment where the anybody can succeed based on self-reliance – a major concept of the American society – far more than in any European country.

    All you need to do is connect the dots.

  10. Dee says:

    Great article, Robert. I only wish I had a money printing machine in my house.

  11. T.I.M. says:

    Mr. Krugman can be taken with multiple grains of salt — or assault. Reason’s
    Tim Cavanaugh recently wrote that he’s now a fool on two continents, Paul seems to think he’s the most brilliant person in any arena in which he steps, and his
    Nobel Prize (for clarifying economies of scale and reduced transport costs) was
    presented by the same clear-thinking rationalists who gave Obama the Nobel Peace Prize based on a nomination after less than two weeks in office.

    The World Cup made an interesting decision the other day. With fans getting upset after getting a closer look at blown calls, FIFA came up with a solution
    that seems in line with some US policy — they got rid of the replay, so nobody
    can take a good look at what really happened. Is that reality humming at our doors, or just a herd of Vuvuzelas?

  12. Boston Blackie says:

    Thanks for your insight. You more than any of us know how these policies are affecting us.
    “I considered standing in front of a landing 747 just so that I could escape the brutal nonsense in which we all live.”
    Don’t do that, for no other reason than this government will bill your family for the cost of cleaning up after you!!

  13. John Buyon says:

    @ Kuassa
    what soviet republic did you grow up in? and how did you get out and arrive at America?

    on your point #5 redistribution of wealth. I have to disagree with you, because you seem to not understand what has happened the last 30 years. wealth has gone from being shared evenly and allocated based on merit to being heavily concentrated in the upper 5%
    why isn’t that wealth redistribution either? why is it only class warfare when the working people fight for their rights? the elites those economic royalists have monopolized all productive capital, consolidated news outlets and opened new markets for themselves worldwide while they socialize the losses and privatize the gains. In the meantime they have amassed so much money that they literally don’t know what to do with it. ever heard of Dubai? the housing bubble? the tech bubble? the commodities run? the gold spike?
    capital has exhausted all productive outlets and is now turning predatory fueling speculation and destroying the standard of living of the working class. it might not sound politically correct to you right wingers, but the uber-rich need to have a good deal of their wealth “confiscated” through a wealth tax of some sorts because they are not investing their money in jobs, and innovation or even in higher wages for the workers, the rate of profit has increased but the wages have decreased. this is a structural problem with american style capitalism, it is being destroyed by the activities of the super-capitalists themselves.

  14. William A. Rose says:

    John Buyon, Marx, Stalin, Pol Pot, Ghengis Kahn and soooooooo many others would be so proud of you.

  15. Dee says:

    Kuassa, thank you for your insight from both sides of the spectrum.
    John Buyon, how exactly would you like to see the “wealth” of a company distributed so that it was “equal”? Would the person who was able to obtain a high school diploma and had no interest in further education, and now sweeps the floor at the company earn the same amount as the CEO and owner, who took advantage of the opportunities for higher education and now runs the company and has made it profitable? Without the CEO and his knowledge and experience, the company would fail and the floor sweeper would have no job.
    I am interested in your perspective. You seem to have a great dislike for those who have taken advantage of educational opportunities and not depended on government handouts but on themselves, and therefore have succeeded finacially. Maybe BO, Bill Gates, George Soros, all the millionaire sports figures and Hollywood elites could throw their money in a big pot and split it among the rest of us. Would that make things even?

  16. Anonymous says:

    3:58, I’ m proud of Buyon, for making me look oh so intelligent.
    What a Canadian dork.

  17. Robert Wallace says:


    “1. the unemployment rate jumped much higher than anticipated because of 2 things. the Obama admin had to paint a rosy picture of the future to ensure business and consumer confidence, and since the mortgage and financial instrument markets were so unregulated no one knew how deep this crisis was. ie. all the money for all the people who lost their homes amounts to $1 trillion. we have spent nearly 2.5 trillion on this already because it isn’t a housing problem it is a problem with the structure of neo-liberal capitalism.”

    As for #1: I don’t buy that Obama’s economic team had a better estimate and that Obama intentionally low-balled the numbers for the sake of consumer confidence. It doesn’t make sense to do that, because the numbers would come out anyway. Then confidence is shaken *and* the White House has less credibility.

    As for #2: The idea that the mortgage market was under-regulated is silly. It’s not about over/under-regulation. It’s about effective/ineffective-regulation. In some ways the financial markets had too much free reign, but government regulation was also a very large part of *causing* the crisis in two ways. First of all they mandated sub-prime mortgages, and secondly the fact that Fannie and Freddie were implicitly backed by the government injected perverse incentives into the market. Financial players could afford to be extra risky because they could depend on a gov’t bailout.

    “2. the “gospel” of spending multiplier versus tax multiplier is in reality actually a gospel. I cant find the report that points out that tax cuts to wealthy ppl boosts economy more than tax cuts for poor ppl/ Gov’tspending
    and besides the stimulus act was $780 B with $288 billion in tax cuts. thats a lot of tax cuts for a supposed socialist. and besides the MPC for workers and the poor and is much higher than it is for and wealthy people and corporations who would choose to invest their new tax rebates in treasury bills rather than consumption.”

    Your failure to find the Romer’s article is not a good argument against their article, John.

    As for the taxes: tax cuts are good but (as with regulation) it’s not always about quantity. The credits for home-buyers was probably good, but there’s a lot of debate over whether cash-for-clunkers did anything at all, and a lot of the one-time payments are going to have limited effectiveness because what matters most is expectations for the future, not a few hundred extra bucks in your wallet once.

    “and whether Keynesianism is cutting edge or not, laissez faire wasn’t born yesterday.”

    That’s a fair point, but all I was pointing out is that Obama’s rhetoric is misleading when he talks about the “failed economic policies of the past”.

    “Any ways chaos would prompt the american people to seriously examine the overarching social, political and economic order reigning over them. I know that I am beginning to draw up some radical conclusions from all this.”

    Not sure what that means, but thinking is a good thing so… yay.

  18. John Buyon says:

    @ Dee
    simple: stronger labor unions the legal prosecution of the $1 billion union busting industry.( there was a time in america where the politicians busted up the monstrous monopoly trusts but now they are busting up the organizations of the workers) establishment of worker cooperatives, flat wealth taxes, income taxes abolished for people making less than 60k, abolish payroll tax and introduce steep carbon taxes, huge taxes on inheritance.
    you are living in a fantasy if you think only hard-work can get you to the top. America has become a LESS socially and economically mobile country in the past 30 years. I love the people you picked as an example of capitalism’s success. The people you pointed out were
    1)born poor Soros and Obama or middle class Gates
    2) are intellectually honest enough to see the flaws of the system that has advanced them so much. look up “gates on capitalism” on you tube
    3) are calling for radical social change and are either politically or economically backing liberalism and social justice movements.
    right wingers however are defending the likes of Lloyd blankfein, tony hayword
    which absolutely boggles my mind because these people don’t need defending and never asked for it.

    there seems to be a problem in your other article I cant post my larger comments anymore.
    I understand what you say about #1&2 but the thing is Obama doesn’t talk with facts about unemployment. sorry to say this the american people are pretty stupid all Obama has to do is sing and dance a little and we believe whatever he says. and on #2 do you know how this easy lending to risky home buyers started out as? Compassionate conservatism of the Bush family. they wanted to dismantle the public housing initiatives from the new deal and set up an “ownership society” laudable was their goal but shortsighted. and also as I said before it was the unregulated and under-scrutinized banks that were given free reign to package their garbage loans as safe investment tools and sell them to pensions and mutual funds. that wasn’t the fault of the government.

    when Obama refers to the “failed policies of the past” he is referencing the Republican sacred cow solution known as tax cuts for every problem. war deficits, surplus’s, terrorism, inequality, everything’s answer seems to be huge tax cuts for the wealthiest.

  19. Dee says:

    Thank you, John Buyon, for answering my question. I agree with a flat tax but not with the other things you mention. There was a time when unions were necessary and even now there is a need for safety oversight in some fields, i.e. the mining industry, but I feel the unions have outlived their usefulness in many areas. Their demands have created many problems in different fields, such as the auto industry and the public school system. They cannot continue to pay retirees huge pensions and healthcare when there are more retirees than workers. I also disagree with huge carbon taxes and huge inheritance taxes. If I work and save alot of money and when I die I leave it to my children, why should they have to pay another tax on my savings?
    Also, I never said that the people I mentioned were successful due to capitalism. I mentioned them as people who have alot of money that if we want to make things “equal”, I would be happy to share their wealth. I truly admire Bill Gates and think that he deserves every penny he earns. Also, I usually don’t get my news from Wikipedia or You Tube.
    Once again, John, it is always a pleasure to discuss things with you.

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