Mercury Rising 鳯女

Politics, life, and other things that matter

The War On The Stimulus

Posted by Phoenix Woman on June 15, 2009

As I noted last week, Paul Krugman has been working to counter the anti-stimulus brigade’s attempt to use the specter of inflation to scare Obama away from fully implementing the stimulus package — or going back for more stimulus cash.

Expect the scaremongers to use this FT piece for fodder:

Challenging the American empire will be the focus of meetings in Yekaterinburg, Russia, today and tomorrow for Chinese President Hu Jintao, Russian President Dmitry Medvedev and other leaders of the six-nation Shanghai Co-operation Organisation. The alliance comprises Russia, China, Kazakhstan, Tajiki-stan, Kyrgyzstan and Uzbekistan, with observer status for Iran, India, Pakistan and Mongolia.

The attendees (who will be joined on Tuesday by Brazil for trade
discussions) have assured American diplomats that dismantling the US financial and military hegemony is not their aim. They simply want to discuss mutual aid – but in a way that has no role for the US or for the dollar as a vehicle for trade among these countries.

[…]

Keen observers of America, if not effective managers of their own economies, these countries argue that the root of the global financial crisis is that the US makes too little and spends too
much.

Especially upsetting is US military expenditure – such as military
aid to Georgia or the presence in the oil-rich Middle East and central Asia – using money that foreign central banks recycle.

This is all predicated on the idea that China is a true economic powerhouse and doesn’t need the US any more, and so can afford to cast us off. However, as another FT piece back in the fall of 2007 showed, China’s wealth and economic prowess has been grossly overestimated since the 1980s.

But let’s set that aside and go ahead and grant the assumption that China really does have the power to topple the US from its economic pedestal. The point that the anti-stimulus crowd will use is that the countries currently funding our spending are horrified at our shockingly high borrowing and spending — and will use this as a club with which to attack the stimulus package. (Never mind that the spending that really has Russia and China upset is not our domestic and private spending, but our military spending — and that’s more envy than anything else.)

This is probably one of the reasons why Krugman came out again today to reiterate his point that, if anything, we’re borrowing lots less than we once did:

Meanwhile, there are demands from several directions that President Obama’s fiscal stimulus plan be canceled.

Some, especially in Europe, argue that stimulus isn’t needed, because the economy is already turning around.

[…]

First of all, while stock markets have been celebrating the economy’s “green shoots,” the fact is that unemployment is very high and still rising. That is, we’re not even experiencing the kind of growth that led to the big mistakes of 1937 and 1997. It’s way too soon to declare victory.

What about the claim that the Fed is risking inflation? It isn’t. Mr. Laffer seems panicked by a rapid rise in the monetary base, the sum of currency in circulation and the reserves of banks. But a rising monetary base isn’t inflationary when you’re in a liquidity trap. America’s monetary base doubled between 1929 and 1939; prices fell 19 percent. Japan’s monetary base rose 85 percent between 1997 and 2003; deflation continued apace.

Well then, what about all that government borrowing? All it’s doing is offsetting a plunge in private borrowing — total borrowing is down, not up. Indeed, if the government weren’t running a big deficit right now, the economy would probably be well on its way to a full-fledged depression.

Oh, and investors’ growing confidence that we’ll manage to avoid a full-fledged depression — not the pressure of government borrowing — explains the recent rise in long-term interest rates. These rates, by the way, are still low by historical standards. They’re just not as low as they were at the peak of the panic, earlier this year.

Exactly.

3 Responses to “The War On The Stimulus”

  1. Charles II said

    Econbrowser points out that there’s no clear signs of recovery. They want to take away the punch bowl before anyone gets a drink.

    • A-yep. I find it particularly ironic that the Europeans, whose economies are far worse off than ours, are proclaiming that the stimulus isn’t needed. (Sounds like they’re trying to justify their own lack of stimulus packages.)

  2. gopaint said

    The thought that anyone is advocating taking the proverbial foot off the gas pedal of the stimulus is horrifying. I can’t think of a better way to send us into a massive depression than to abandon or reduce stimulus spending. If anything, we will need MORE stimulus, not less.

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