Liberal columnist and Nobel prize winning economist Paul Krugman has been outspoken in his opinion that the $787 billion dollar “stimulus” package passed by the Democratic Congress and signed into law by President Obama was too small. In column after column after column, Krugman has argued that more money should be spent by the federal government and the reason we continue to have a sluggish economy is because government hasn’t spent enough.
Unfortunately we haven’t seen other economists get the same media exposure as Krugman. And we certainly haven’t had the benefit of hearing from many other Nobel prize winning economists who oppose the Krugman view.
But, they are out there. For instance Nobel prize winning economist (1992) Gary Becker has recently taken issue with the entire thrust of the Krugman claim. While he hasn’t taken Krugman on by name, a recent blog post where he explores why Germany is coming out of the recession in so much better shape than the US essentially debunks the Krugman formula.
His analysis of the German economy and how the government approached the recession points to governmental policies which are almost diametrically opposed to those that have been instituted by the US government. The proof of which works, one would think, is to found in the result. Becker explains from there:
Germany was criticized because it did not have a big enough stimulus and did not run large enough fiscal deficits to stimulate the economy. In early 2009, Germany introduced a 50 billion euro stimulus package after much urging from intellectuals and some economists. That is about 1.6% of its GDP, with about one-third earmarked for infrastructure improvements, and the other two thirds going to tax cuts, child allowances, and social benefits. Even more important from the traditional “stimulus” analysis, Germany’s fiscal deficit is expected to hit between 5-6% in 2010, smaller than the fiscal deficits in many euro-zone countries.
Contrast these numbers with those for the United States. The American stimulus package of about $800 billion-by no means as yet all spent- is 6% of American GDP, about four times as large relative to GDP as the German stimulus. Even more telling is that the fiscal deficit during 2009 and expected during 2010 amount to about 12% of American GDP, far larger than the fiscal deficits Germany has been running. Germany has recently taken actions to cut spending and raise some taxes, while the US government continues to think of ways to increase government spending, as if the huge fiscal deficit is not enough. (Emphasis added)
So we have a program at work in Germany that cut taxes, used a small fiscal stimulus which will impact their GDP much more lightly than the stimulus the US spent and Germany is now in better shape economically and German unemployment is back to its pre-recession 7.5% while the US’s languishes at 9.5% – officially.
Becker is careful not to attribute the continued economic malaise solely on the size of the US stimulus or the large fiscal debts the US administration has racked up. But he does indeed consider them to be a major factor:
Let it be clear that I am not claiming that US employment and unemployment has been very sluggish in recovering to pre crisis levels mainly because the US has had a large stimulus package and large fiscal deficits. They probably have been factors, but the evidence is still too uncertain to reach such a judgment. But it is clear that the stimulus package completely failed relative to the explicit predictions of the Obama administration and its Council of Economic Advisers about what would happen to unemployment. They predicted unemployment would decline by about 1.5 percentage points from a much lower peak, whereas so far the total decline from the higher unemployment peak of 10.2% is only 0.7 percentage points.
That’s a very nice way of saying, “while I can’t directly attribute the sluggish recovery and high unemployment to the large stimulus and deficits, I can say they didn’t work.” And of course, that goes right to the heart of the Krugman argument – especially with the example of Germany as counter-argument for the necessity of either a large stimulus or huge deficits.
And there’s another reason Becker won’t commit to a direct attribution of the large stimulus and large deficits as the sole reason for this non-recovery “recovery”. It has to do with other fiscal policy:
I continue to believe that the biggest factor in the sluggish employment recovery of the US is that many of the actual new and proposed anti-business legislation, as well as the large fiscal deficits, made businessmen and investors cautious about taking on new workers. These proposals and laws include the health care bill, the pro-union bias and anti-business rhetoric of Congress and the president, suggested increased taxes on higher earners, changes in anti-trust laws to be less pro-consumer, and the endlessly complicated and largely misplaced financial “reform” law. Germany, by contrast, has continued with the same coalition government headed by the mainly pro-investment, pro trade Christian Democrats. Germany surely made various mistakes during this recession, but the US has made many more. (Emphasis added)
This is a very important point. Readers may recall Mort Zuckerman, editor-in-chief of US News and World Report, calling the Obama administration’s fiscal policies our “economic Katrina”. Becker seems to agree. One of the biggest problems facing the US right now is the fact that it is government, through its new policies, regulations and laws, has so unsettled the marketplace that in general businesses simply are sitting on their hands (and money). Businesses aren’t hiring or expanding until they have a better understanding of what the cost of doing either – in taxes, health care and regulatory costs – will be. Until that is settled in the minds of business owners, nothing will happen. And if businesses determine that the new laws and regulations burden them with costs which are so onerous that don’t warrant hiring any new help or expanding the business, this economic malaise will continue and deepen.
The choices of what to do in this situation were fairly clear. Do what the US did, based in outmoded economic theory from the likes of Paul Krugman which claims government spending is the key to recovery, even if it requires massive deficits. Or do what Germany did – kick in a little, be pro-business through tax cuts, enable workers with child allowances and other social benefits and then basically get government out of the way.
Germany took a 5% hit to their GDP at the beginning of the recession. The US had a comparable loss. Yet Germany is now looking at a solid 2% growth with unemployment back to pre-recession levels. The US on the other hand has run up massive deficits, seen unemployment skyrocket by 5% and economic growth has been anemic at best and mostly the result of government spending.
An objective person could make the case that the study of these two economies in recession and the policies that were implemented by government to battle it may prove, once and for all, that Krugman, et. al. have it all wrong with their economic prescriptions. And they’d probably be right.
