Krugman to Obama - act more boldly than FDR

Paul Krugman points to the data from the 1930s and points out that the setback towards recovery in 1938 was caused because "...in 1937-38 FDR was persuaded to do the “responsible” thing and cut back — and that’s what led to the bad year in 1938". The stimulus itself was also quite small compared to the shortfall of production caused by the Depression. So to properly apply Keynesian stimulus to the economy what is really necessary is to be bolder than FDR was.

Krugman does not add that the economy needs to be restructured so that consumers receive a fair share of the increases in productivity if the economy is to continue growing. To be fair, Krugman merely blogged on the one point above. There's a lot more to be said and done to repair the American economy and get us out of the slump created by the conservatives of the Reagan Revolution.

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Addendum 4:20 pm
Krugman also makes a very important point in another of his blog posts.

state and local governments operate under fiscal rules that lead to booming spending and tax cuts when the economy is strong and the reverse when the economy is weak. This is bad governance: services are cut precisely when people need them most. It’s also bad macroeconomics: it exacerbates the business cycle.

Right now, we’re seeing a sharp drop in state revenues, which is going to lead to big cutbacks in spending and tax increases at exactly the wrong time.

Obama mentioned aid to state and local governments in his press conference yesterday. Indeed. This is a very quick form of fiscal stimulus, because it’s not about starting new spending, it’s about sustaining current spending. It should be done immediately.

State and local governments operate under rules that require balancing budgets and not spending more than the immediate revenue permits. That means reducing spending to match reduced revenue during recessions. In government reducing spending means laying people off. That is a process that reduces consumption at the same time that the recession itself is growing worse because of reduced consumption.

A household has to operate that way, but the American federal government can borrow money internationally because the dollar is still the global reserve currency and because the American economy is the lynch-pin economy in the global world economy. Economists have recently been talking about the American economy becoming "decoupled" from the rest of the economies of the world, but the way our recession has so rapidly spread worldwide has ended such talk.

What that means is that if the rest of the world thinks that the American government will use the money to keep its economy functioning at higher levels, the rest of the world will continue to loan us money. (That means they will probably NOT loan us money to use for unnecessary wars, or they will loan us at higher interest rates.) It's to their own benefit to lend us the money we need to get out of recession. That's why Barack Obama is not going to be as restricted by lack of funds as so many in the media think he will. The current need for funds is no greater a proportion of the American GDP than was the case in WW II, and we came out of that period with rapid growth because of all the industrial building that had been done by the government during the war.

The Congressional conservatives will not buy this logic, which is strange because they generally buy the same kind of logic when they claim that supply side economics says that tax cuts pay for themselves.

The difference between the two ideas (government stimulating consumption vs. tax cuts for investors) is that economically government stimulus of the economy has been shown to produce a lot of growth per dollar of stimulus, while a dollar of tax cut rarely (and never at current low tax rates) has been shown to return as much as a dollar in revenue. Be that as it may, expect both the Republican conservatives and the blue-dog Democrats to fight deficit spending. Economic research-based facts will not change their conservative ideology. That's where Obama is going to have troubles in acting more boldly than FDR and turning the economy around.

We can count on that. It's part of the conservative anti-intellectuality and their fear of academic "elites."

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Addendum 11/9/08 5:52 pm
Fareed Zakaria agrees with Krugman that Obama should not jettison his big plans because of the poor economy. The current situation requires aggressive action to cause the economy to turn around, so it is unlike the situation Clinton faced in 1993 in which borrowing money would raise the interest rate and slow the recovery that had already begun. His other argument involves the international economy.

One reason you worry about deficits is the loss of confidence it might generate abroad. If foreigners lose faith in the federal government's ability to pay its bills, they could dump their dollars and switch to other currencies. But, as Zakaria pointed out, the rest of the world facing the same economic plight we are; they're all going to be running high deficits in the short- to medium-term. A run on the dollar seems extremely unlikely.

Smart economists have been making this argument for a while now, but it's taken a while for non-economists to pick it up.

I concur with the recommendation for both reasons. More important, Kevin Drum considers Zakaria to be a representative of the accepted wisdom of the Washington villagers so that they probably also agree with him. That will make it a lot easier for Obama to go forward full speed.

That's another vote for Obama to act boldly.