The Politics of the Stimulus: Two Views
October 9, 2011
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Ezra Klein has a long but excellent post on the Obama Administration’s response to the economic crisis. Krugman responds here. I think Klein is right about the politics and Krugman takes him to task on the economics and rightly nails the Obama Admin for adopting conservative fiscal talk and, more generally, not making a stronger case politically. I have faith in Obama’s team ability to learn and my bet is that they’ll play this well heading into the 2012 election.
Those of us who have devoted lots of time thinking about the politics of banking crises knew that this time it would not be different. Not in a context with big capital inflows, big debt, and lax prudential regulation.
Europe, by the way, is exactly where we were with the first stimulus discussed by Klein and Krugman in their essays. I believe it is the appropriate analogy. They approved a financial package that too small to ward off speculation beyond the short run, though they did approve as much as was politically possible at this time. Essentially, their banks are broke and their forthcoming financial crisis will produce a recession that is likely to be deeper than ours. The Great Recession will continue. Italy, Spain, Greece, etc will drop the Euro. During the first year of Obama II we will finally get the massive stimulus we will need. Maybe.