President Barack Obama took office in the midst of a financial crisis that had sent the U.S. economy into a tailspin. The two most pressing tasks of the incoming administration were to stabilize the economy and to restore economic growth. There was an intense debate among economists regarding the best way to deal with the crisis and to put the economy on a path to recovery.
Many economists argue that a stimulus would be the surefire way to ensure that the economy would regain its footing. Paul Krugman was an early and prominent advocate for a stimulus. He forcefully argued for a big stimulus. Other economists, particularly those of the conservative persuasion, criticized the idea of a big stimulus because they said that it would lead to inflation, hinder rather than facilitate economic recovery, and would spook the bond market, thereby making it more expensive for the U.S. to borrow money. They favored austerity as the best remedy for the ailing economy. Three years later, the verdict is in: Krugman, the Nobel Prize-winning economist, has been vindicated and the critics of the stimulus have been wronged, as none of their predictions had come to fruition
After the Obama administration passed the stimulus bill, many critics argued that the bill not only would fail to revive the economy but would cause inflation. Although Krugman supported the notion of a stimulus bill, he made the case that the bill needed to be much bigger not only to jump-start the economy but to provide the economic boost that would be needed to recoup the tremendous job losses that occurred as a result of the Great Recession. In other words, the bill needed to match the scale and the severity of the crisis.
The financial collapse resulted in a $3 trillion hole in the economy. Because of the fierce opposition of the Republicans in Congress against the stimulus bill, the Obama administration managed to shepherd only $767 billion- worth out of Congress for the stimulus. Thus, the bill didn't match the $3 trillion crisis. It was insufficient to fully plug the economic hole.
The financial crisis triggered an explosion in home foreclosures and mass unemployment. As a result, many states have seen their revenues plummeted. In the beginning of the crisis, the stimulus money helped many states to deal with their budget shortfalls. As the money began to run out, many states resorted to mass layoffs of teachers, firefighters, police officers, and other states employees. With a much bigger stimulus, the administration would have been able to provide more financial aid to the states, which in turn would not have to engage in such layoffs to try to balance their budgets. Therefore, many states were forced to adopt policies that have mitigated instead of strengthening the impact of the stimulus.
Inflation has not been an issue that affected the economy. Hence, those who postulated that the stimulus would cause inflation to rear its ugly head have been wrong. The stimulus has helped the economy recover, evident in 23 consecutive months of job creation. As predicted by Krugman, however, the recovery has not been as robust as it could have been because a smaller stimulus bill has prevented the administration from providing many still-cash-strapped states with the needed financial help. Therefore, the huge spike in government job losses has been a major drag on the economy. Without those job losses, it has been estimated that the unemployment rate would be 7.1%.
Moreover, the fear that the bond market would become skittish as a result of the stimulus bill has not materialized. Even Larry Summer, economic adviser of president Obama, was concerned that the market might be alarmed by the passing of a bigger stimulus. Krugman has been on the opposite side of the argument. Its borrowing cost is so low that the U.S. is practically being paid by many investors to borrow their money. Such development is another indication that Krugman made the right call.
While Krugman has been an ardent critic of austerity since the beginning of the crisis, many critics of the stimulus have been pushed for austerity measures as the most effective way to revitalize the economy.
But, as has been shown in Europe, austerity has been put to the test. And after many years of implementation, there has been resounding evidence that austerity has failed miserably. A number of European countries that embraced this policy are mired in high unemployment and anemic economic growth. Once again, Krugman has been correct in his diagnosis.
Although Republicans do not support providing more financial aid to the states, which would allow them to keep more government employees in their job, they have conveniently forgotten that under Ronald Reagan, the government did not engage in massive layoffs. In fact, the government went on a hiring spree. The rank of the public sector was swelled by more than 1 million people in 1985 alone. This sharp uptick in government jobs played an important role in bolstering the economic recovery during the presidency of Reagan. Now, when a Democrat occupies the White House, the GOP claims that the government does not create jobs.
Krugman has been vindicated time and time again by either events or accumulated evidence. In fact, a study that gauged the predictive ability of many commentators as well as some politicians revealed that Krugman has been the most accurate in his predictions.
There is a tendency among some economists to remain within the confines of economic models and lose sight of the human dimension when they discuss the economy. In many of his writings, particularly those pieces that deal with the Great Recession, Krugman has gone beyond the numbers or economic models to shine the spotlight on how economic policies are impacting people and evaluating whether those policies would allow many of them to realize their potential or cause their dreams to be deferred. Moreover, Krugman has used his perch at the New York Times to help many of his readers, especially those with no background in economics to have a better understanding of the economic issues that face the country. Unlike many other journalists or political commentators, his analysis tends to be under-girded by empirical data, which help to explain why he has been so eerily prescient in his forecasts. Since he does not have to cultivate sources for his columns, he is not afraid to speak truth to power. That is why his voice has been so indispensable in our political deba