Paul Krugman calls for continued government support

Despite those warm eyes and soft smile, this is the face of a very angry man.

NYT columnist Paul Krugman schooled the government with his wrath-filled editorial last week. He invoked everything from the Great Depression to a year of grief ahead in an attempt to convince the feds that we need more stimulus than ever to keep the economy afloat.

The next G.D.P. report is likely to show solid growth in late 2009. There will be lots of bullish commentary — and the calls we’re already hearing for an end to stimulus, for reversing the steps the government and the Federal Reserve took to prop up the economy, will grow even louder.

But if those calls are heeded, we’ll be repeating the great mistake of 1937, when the Fed and the Roosevelt administration decided that the Great Depression was over, that it was time for the economy to throw away its crutches. Spending was cut back, monetary policy was tightened — and the economy promptly plunged back into the depths.

The reason we are seeing blips of recovery, according to the Nobel-prize winning economist, is due to an “inventory bounce.”

When the economy slumps, companies typically find themselves with large stocks of unsold goods. To work off their excess inventories, they slash production; once the excess has been disposed of, they raise production again, which shows up as a burst of growth in G.D.P. Unfortunately, growth caused by an inventory bounce is a one-shot affair unless underlying sources of demand, such as consumer spending and long-term investment, pick up.

And he doesn’t let Obama off the hook.

The Obama fiscal stimulus plan is expected to have its peak effect on G.D.P. and jobs around the middle of this year, then start fading out. That’s far too early: why withdraw support in the face of continuing mass unemployment? Congress should have enacted a second round of stimulus months ago, when it became clear that the slump was going to be deeper and longer than originally expected. But nothing was done — and the illusory good numbers we’re about to see will probably head off any further possibility of action.

Happy 2010!

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One thought on “Paul Krugman calls for continued government support

  1. Another Keynesian clown. Bush’s quarter of a trillion stimulus in ’08 had no effect. Obama’s almost trillion in stimulus this past year has had little impact. What is a Keynesian like Krugman call for? Yes, more of what’s not working very well – more stimulus.

    All they know is spend and inflate. Boom and bust.

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