Tuesday, 30 June 2009

Paul Krugman versus the stimulus

Many of you will have noticed Paul Krugman's continuing demands for a bigger fiscal stimulus - he thinks it should be around double the size proposed by the administration. If nothing else, we have to give him credit for being consistent, right?

Well...maybe not. You see, I came across an old article where he was, as usual, insisting that the stimulus should be doubled...but only to $600 billion! A double-take. Could it ever be true that the administration was proposing only a $300 billion stimulus? Yes it could - in fact in the early days of the election campaign Obama's proposal was for a stimulus of $60 billion. No wonder Paul originally supported Hillary.

I thought it would be interesting to run a comparison of Paul Krugman's desired stimulus versus the stimulus proposed (and eventually passed) by the Obama administration. Here it is (click on the graph for a larger version). The red line is the administration's efforts and the blue is what Paul wants:

The red line fluctuates as the administration floats a few different figures to test out media reaction - presumably not including the reaction on Paul's blog.

Meanwhile Paul doesn't always give a figure - sometimes a call for a "huge", "big" or "strong" stimulus suffices. At one point he admitted that the administration's package was "not bad" but soon realised it was, in fact, "too small".

Now I heard somewhere that correlation does not equal causation. There could be a common cause for both of these increasing lines - a worsening recession. But I well remember all the cries of apocalypse throughout last year, and so far I don't think we have seen anything much worse than predicted at the height of the financial crisis in August and September. Perhaps it just takes a while for these things to sink in.

Or could it be that whatever level the administration picked, Krugman would insist on more? Some have speculated that he wants to offer political cover to the Democrats by making it look like they have stayed well within the bounds of what their left wing wants.

I like Paul Krugman and prefer to ascribe him only the noblest of motives. But it might be worth his while to explain what has changed over the last six months to nearly triple the size of his ideal stimulus package.

1 comment:

PunditusMaximus said...

My understanding is that his numbers were based on a rolling calculation of some of the gaps in private borrowing -- that is, that things kept getting worse.