By Arnold Kling
Paul Krugman says that we need a big fiscal stimulus. He writes,
Unemployment is currently about 7 percent, and heading much higher; Obama himself says that absent stimulus it could go into double digits. Suppose that we’re looking at an economy that, absent stimulus, would have an average unemployment rate of 9 percent over the next two years
Krugman says a lot more, but I have quoted the key part of the argument. An unemployment rate of 9 percent for two years would be a really long, large deviation from full employment. [UPDATE: A new CBO forecast says that the unemployment rate will exceed 9 percent early in 2010. That is not the same as saying that it will average 9 percent for the next two years. On the other hand, Mark Zandi seems to be even more pessimistic than Krugman.] I think that (a) we are unlikely to have such a long, large deviation and (b) if we do, it will be because the structural adjustments required in the economy are larger and more difficult than I realize. Cyclical unemployment, which means workers laid off from temporarily-depressed durable goods producers, is unlikely to be so bad. And that is the type of unemployment that fiscal stimulus is most likely to be able to correct. The efficacy of fiscal stimulus for dealing with structural unemployment is extremely doubtful.
Hal Varian wants to see more private investment. To the extent that structural unemployment is the problem, I think that private investment is more likely to redeploy workers in a constructive, long-term way.
Foreign Policy looks at five prophets of doom. Thanks to Mark Thoma for the pointer. Except for Robert Shiller, all of them say that we have to pay for our sins of bubbles and over-consumption. Like the character Apollo Creed [a commenter points out that it was Clubber Lang, not Apollo Creed] in one of the Rocky movies, their forecast is for pain. They convey the sense that good times are an illusion and now we must suffer for that illusion. This resonates with the sentiment in a popular type of religious sermon, even if there is little, if any, economics behind it.
UPDATE: Jane Shaw writes,
By asking the taxpayers to rev up those projects, the [university] administrators are essentially saying that if state taxpayers can’t afford a project, some mythical “federal taxpayer” can.
Read the whole thing. Many people are saying that a key component of the fiscal stimulus should be support for state governments, so that they do not have to reduce spending. Yes, from a Keynesian perspective, you always want to transfer wealth from the prudent to the profligate. But from any normal perspective, you don’t.