Krugman says that he doesn’t want to relitigate the debate over stimulus. I am less inclined to let bygones be bygones.

Now, in contrary I don’t think Obama should have started with a higher number for spending – though that would have been preferable to what happened.

I would have started with a much higher number for tax cuts. Indeed, “the stimulus” could have been exclusively tax cuts and much much bigger ones. As I floated before, there was the possibility of simply suspending the payroll tax entirely.

Other measures could have been take on practical rather than stimulus grounds. For example, extending aid either in the form of grants or loans to the states, not explicitly for “stimulus” but because otherwise teachers and police officers would have been laid off. An expansion of unemployment and COBRA benefits simply because they are needed by the newly unemployed.

However, the big bang, could have come from tax cuts. Indeed, as Krugman points out – what little boost there was did in fact come from the tax cut provisions. There was little expansion in government spending when federal increases are combined with state and local decreases.


Indeed, on net the government spending seems to have been mildly contractionary. Here is growth in government spending relative to its longer run average of more or less 6 percent.

FRED Graph

Bars above zero represent when government expenditures were growing faster than 6%, bars below zero when they were growing slower.

Looking at the the last few years, there is more mass below the line than above it, meaning that the growth in government spending has tended to be below the long run average. The belt was tightened in effect, though not as much as the economy overall, of course.

Since that was the net effect, why not propose it that way? Call “stimulus” the large payroll tax cuts. Propose aid to the states in an effort to offset otherwise massive budget cuts.

This was a major error for the Administration, not just in political terms, but much more importantly in policy terms. Failure to provide adequate stimulus may have permanently displaced some people from the labor market and has scarred the skill development of several cohorts of high school and college graduates.

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