Recovery and Reinvestment

Dean K Baker has posted an interesting story on Alternet about Republican motivations for blocking Obama ‘s American Recovery and Reinvestment Plan.  Baker’s theory?  The Republican fear of 20 years out of power.  Baker argues that despite evidence that the New Deal helped millions Republicans now think no intervention would have been better policy.

At least some Republicans are starting to muster an anti-stimulus drive, claiming that President-elect Obama’s package will not help the economy. Their drive is centered on what they claim is a careful rereading of the history of the New Deal. According to their account, President Roosevelt’s policies actually lengthened the Great Depression.

In their story, we would have been better off if we just left the market to adjust by itself. New Deal programs that directly employed people, or in other ways supported living standards, created an uncertain investment climate. They claim that this uncertainty slowed the process of market adjustment that was necessary for returning to high levels of employment.

The Wagner Act, which created the legal framework for the union organizing drives of the era, stands out as being especially pernicious in their story. The Fair Labor Standards Act, which created the 40-hour workweek and established the first national minimum wage, also gets singled out for criticism. In this new reading of history, what most people consider the great successes of the New Deal simply worsened the Great Depression.

We are hearing Republicans (and some Blue Dog Democrats) worrying about the size of the deficit.  Even though Many economists, including Paul Krugman, argue that the proposed Recovery and Reinvestment dollars are still too little.  Krugman explains what he calls the output gap.

Bear in mind just how big the U.S. economy is. Given sufficient demand for its output, America would produce more than $30 trillion worth of goods and services over the next two years. But with both consumer spending and business investment plunging, a huge gap is opening up between what the American economy can produce and what it’s able to sell.

And the Obama plan is nowhere near big enough to fill this “output gap.”


To close a gap of more than $2 trillion — possibly a lot more, if the budget office projections turn out to be too optimistic — Mr. Obama offers a $775 billion plan. And that’s not enough.

Now, fiscal stimulus can sometimes have a “multiplier” effect: In addition to the direct effects of, say, investment in infrastructure on demand, there can be a further indirect effect as higher incomes lead to higher consumer spending. Standard estimates suggest that a dollar of public spending raises G.D.P. by around $1.50.

Both Baker and Krugman worry that we are not planning enough public spending.  Baker again

Roosevelt was too worried about the whining of the anti-stimulus crowd that he confronted. He remained concerned about balancing the budget when the proper goal of fiscal policy should have been large deficits to stimulate the economy. Roosevelt’s policies substantially reduced the unemployment rate from the 25 percent peak when he first took office, but they did not get the unemployment rate back into single digits.

It took the enormous public spending associated with World War II to fully lift the economy out of the depression. The lesson that economists take away from this experience is that we should be prepared to run very large deficits in order to give the economy a sufficient boost to generate self-sustaining growth.

The bottom line is that President Obama and the Democrats in Congress need to get over worrying about deficits and get on with the business of closing the output gap.  As Dean Baker explains, part of the Republican objection is that is the Democats are sucessful is turning around the economy, the Republicans could spent the next 20 years out of power.

However, from the standpoint of Republicans, the more ominous lesson of the New Deal policies is that it left the Democrats firmly in power for more than 20 years. The Republicans did not regain the White House until 1952, 20 years after President Roosevelt was first elected.

Imagine how terrifying the prospect of 20 years of Democratic presidencies must be for the current generation of Republican leaders. This would mean that they would not retake the White House until 2028, just 20 years before the Social Security trust fund is first projected to face a shortfall.

In 2028, Newt Gingrich will be 85 years old; Mitt Romney will be 81; Mike Huckabee will be 73 and Senator McCain will be 98. Even Sarah Palin will be a less than youthful 64. In short, if President-elect Obama is allowed to carry through with his stimulus package and the rest of his ambitious domestic agenda, most of current leadership of the Republican Party can expect to spend the rest of their political career in the political wilderness, far removed from the centers of power

Krugman’s bottom line

… is that the Obama plan is unlikely to close more than half of the looming output gap, and could easily end up doing less than a third of the job.

Krugman suggests that spending on items like health care can help if there are not enough “shovel ready” projects to spend on right away.  Is the current Obama plan really only the first installment?

Obama’s reaction to Krugman’s column was telling:  He’s probably going to end up meeting with Krugman and listen to his ideas.  What a refreshing change from George W.  who didn’t need to talk to anyone or to consult with others because he knew what they thought.  Obama said he had “no pride of authorship”, just didn’t want the debate to hold up action.

President Elect Obama, don’t worry about the deficit.  Get us out of this mess, close the output gap and over the next twenty years we will have another Bill Clinton come and reduce the deficit.  You don’t have to do it all – and you certainly don’t have to do it all right away.