Fixing the economy: We got it wrong

In his article Fixing the economy: We got it wrong, James K. Galbraith explains why Obama and his advisers “misunderestimated” the needed size of the stimulus package. Here is a tiny excerpt to whet your appetite for reading the whole article:

The next mistake was to base policy on the forecasts. The sensible thing would have been to paint the bleakest possible picture, emphasizing the extraordinary crisis, and so justify the largest possible policy action. Then if things turned out all right President Obama would have gotten credit, and any excess actions could easily have been cut back. Instead, the president set himself and his policies up for blame.

Obama’s approach contrasts sharply with how President Reagan handled the recession of 1981-82 — with massive tax cuts enacted in 1981. I did not like Reagan’s tax cuts, but everyone could see that they implied a truly massive stimulus. This was politically smart, as Reagan’s reelection proved. And when the message had been delivered, the cuts were trimmed in 1982, 1984 and 1986.

The above two paragraphs cover only a part of Galbraith’s recommendations.  Even so, Galbraith missed one factor.  The skewed distribution of wealth and income makes a self-sustaining employment recovery just about impossible.  If the middle-class no longer would have enough income to buy all that a full-employment economy could produce, what would be the economic justification to put everyone back to work?  Without the buying power, the full-employment economy would produce more than needed by the customer demand.

Tax and other policies must be changed in order to fix this issue.

Galbraith also should be careful to define who the “we” is in the “We got it wrong”

Doing just a little Google searching to see if anybody recognized in 2009 that the stimulus was too small, I came up with the following:

Senate Dems on Obama Stimulus: Size Matters, January 09, 2009

I’d guess that the Democratic dismay must run pretty damned deep for them to oppose Obama on his stimulus plan. Good, because it isn’t big enough:

Economic stimulus on the cheap, February 9, 2009

For US senators, decreasing the size of the stimulus package may be clever politics. But it’s not smart economics

Krugman: Obama’s Stimulus Doesn’t Go Far EnoughThe Obama Gap,  January 8, 2009

 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.”

Even taking a quick look at what was on this Steve’s Politics Blog in January, 2009, I find the following:

Be Bold With Economic Stimulus. January 14, 2009

To put it another way, if Obama proposes to do more than we find out that we need, he can always cancel some of his proposals.  On the other hand, if we eventually find out that we need more than he has proposed, it may be too late to add these items by the time we find that we need them.

One of my reasons for having this blog is so that I can have a record of who said what and when.  I can bring out the “I told you so” whenever someone claims that “nobody knew at the time.”

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