Economist to Congress: Don’t stop at stimulus

By Lisa Mascaro (contact)

Thursday, March 26, 2009 | 2 a.m.

Krugman

Washington — As Nevada’s lawmakers question the taxes and spending in President Barack Obama’s $3.9 trillion budget, a Nobel Prize-winning economist told Congress on Wednesday that even more government outlay is needed to right the economy.

At a House Appropriations subcommittee hearing, economist Paul Krugman took lawmakers on a romp through the lessons of economic history and exposed the stark choices facing the nation at this pivotal point.

“We all hope that President Obama’s policies can pull the economy out of its tailspin,” Krugman told the committee. “But even if he does succeed in that goal, that will not be enough.”

More needs to be done to reverse the economic forces that have squeezed the middle class for decades as the richest Americans grew wealthier, said Krugman, a New York Times contributing columnist and a Princeton University professor who won the 2008 Nobel Prize in economics.

As his visit to Capitol Hill showed, Krugman is a polarizing figure. The political left reveres him as an oracle. At the hearing, Democratic Rep. Nina Lowey of New York said of his Times column, “Many of us look at it as the truth.”

Many on the right see his views as radical socialism.

Obama’s spending plan is a bold blueprint of big-ticket initiatives to fulfill campaign promises: Overhauling health care with universal coverage and taxing greenhouse gas polluters with a cap-and-trade system to get the country off foreign oil and fossil fuels.

Congress is treading lightly, still stunned at the pace of spending that has been needed stop the country’s economic dive — a now-$1 trillion Wall Street bailout and the $787 billion economic recovery package for Main Street.

Deficit spending under Obama will be reduced initially, but in future years it will grow at rates that have alarmed even some in his own party. While most families would get tax cuts under the Obama plan, those earning more than $250,000 annually would see their taxes rise.

Republicans have widely dismissed the budget as too much taxing, too much spending, and not enough debt reduction.

Even Nevada’s Democratic lawmakers in the House, Reps. Shelley Berkley and Dina Titus, have shied from some tax proposals on the wealthy as they support Obama’s overall goals.

On Wednesday the committee’s chairman, Democratic Rep. David Obey of Wisconsin, opened debate with a question on many minds.

“There are those who will say, ‘Now that we’ve passed an economic stimulus package, we need to scale back on size of expenditures and scale back on deficits,’ ” Obey said. “Tell me why you think that would not be a good idea at this time.”

Krugman explained how economic growth over the past several decades has not translated to rising middle class incomes. Most Americans are no better off now, despite the country’s increased output, as median incomes rose at a fraction of their rate during the postwar boom.

“The outlook for working Americans is the grimmest it has been since the Great Depression,” Krugman said.

Some 2.5 million jobs have been lost, almost as many as the 3.5 million Obama’s plan promises to save or create. The stimulus so far is “not even enough to prevent us from having a severe recession,” Krugman said. “It’s just a mitigating factor.”

Putting the brakes on government spending now, when even extremely low interest rates are not compelling the private sector to spend, will dilute the effect of the stimulus, he said. He pointed to President Franklin Roosevelt’s decision to curtail government spending during the Depression, which led to higher unemployment after years of decline, and to a similar mistake Japan made more recently.

“Just as Japan repeated Roosevelt’s experience, we will then repeat Japan’s experience,” Krugman said.

These are fighting words for Republicans, who have been arguing that government spending did not end the Depression.

All sides agree that World War II ultimately restored the nation’s economy, however, and for the purposes of evaluating the effects of government spending on the Depression, many believe the war should be considered the ultimate economic stimulus. The federal government paid to put millions of citizens to work.

Senate Republicans plan to offer amendments to Obama’s budget that would hold spending flat this year, except for growth in military spending.

Nevada Sen. John Ensign, his party’s fourth-ranking leader in the Senate, has said the red ink in Obama’s budget translates into a second house payment for every American household.

Republican Rep. Dean Heller wrote an op-ed Wednesday for the Washington newspaper The Hill saying growing government is the opposite of what the country needs.

The committee’s top Republican, Rep. Todd Tiahrt of Kansas, told Krugman he was not a believer in government-led spending. Like Nevada’s Republicans, he prefers tax cuts to stimulate private business.

“I have yet to see a government job that pays for itself,” said Tiahrt, who worked on space and military projects for Boeing before being elected to Congress in 1994. “My concern is the direction the country is going ignores the fact that the rising tide raises all boats.”

Obey offered a different view. “I’d like to think the rising tide raises all boats,” Obey said. “At some times in our recent history, it appears a rising tide has raised only all yachts.”