The rapidly approaching fifth anniversary of the Lehman Brothers bust is bringing with it reflections of how far we’ve come. Yet general agreement is it’s not far enough, especially in light of another disappointing jobs report for August.
Nobel laureate and political gadfly Paul Krugman wrote a particularly scathing piece in The New York Times on Thursday, calling President Barack Obama's economic policies since the 2008 collapse a “horrifying failure.” Playing off the old adage, when you’ve lost Paul Krugman, you’ve lost middle America.
“Set aside the politics for a moment, and ask what the past five years would have looked like if the U.S. government had actually been able and willing to do what textbook macroeconomics says it should have done — namely, make a big enough push for job creation to offset the effects of the financial crunch and the housing bust, postponing fiscal austerity and tax increases until the private sector was ready to take up the slack,” Krugman breathlessly began.
His back-of-the-envelope calculation of what such a program would have looked like revealed a stimulus about three times as large as the actual stimulus, “would have been much more focused on spending rather than tax cuts.”
Would such a policy have worked? All the evidence of the past five years says yes, he argued.
“The Obama stimulus, inadequate as it was, stopped the economy’s plunge in 2009. Europe’s experiment in anti-stimulus—the harsh spending cuts imposed on debtor nations—didn’t produce the promised surge in private-sector confidence. Instead, it produced severe economic contraction, just as textbook economics predicted. Government spending on job creation would, indeed, have created jobs.”
But what about debt, he asked before answering. According to his “rough calculation,” federal debt currently held by the public would have been about $1 trillion more than it actually is, and “alarmist warnings about the dangers of modestly higher debt have proved false.”
“Meanwhile, the economy would also have been stronger, so that the ratio of debt to GDP — the usual measure of a country’s fiscal position — would have been only a few points higher. Does anyone seriously think that this difference would have provoked a fiscal crisis?”
He concluded with a pox on both their houses, and noted it was important to realize how badly the country’s policy failed and continues to fail.
“Right now, Washington seems divided between Republicans who denounce any kind of government action — who insist that all the policies and programs that mitigated the crisis actually made it worse — and Obama loyalists who insist that they did a great job because the world didn’t totally melt down. Obviously, the Obama people are less wrong than the Republicans. But, by any objective standard, U.S. economic policy since Lehman has been an astonishing, horrifying failure.”
Check out Marc Faber: 3 Reasons a Crash Is Coming on ThinkAdvisor.