The Most-Effective, Quickest Way To Create More U.S. Jobs


Nobel Prize-winning economist Paul Krugman has urged President Barack Obama to not make a fiscal cliff deal with Republicans.

It isn't every day that investors -- or readers for that matter -- are provided with an incisive, succinct answer to a complex problem, but that's exactly what attendees received Wednesday night at New York's Princeton Club talk on the U.S. economy.

New York Times columnist and Nobel Prize-winning economist Paul Krugman said, in so many words, that the solution for the tepid growth and high U.S. unemployment of the financial crisis era is not complex, and it's not a mystery.

The solution is Keynesian economics -- in the form of federal government fiscal stimulus.

Supply-Siders Still Don't Get It

Supply-side economists and ideological conservatives will disagree, but Krugman argued the evidence supporting both the necessity and effectiveness of fiscal stimulus is overwhelming.

For those conservatives who argue that the $800 billion fiscal stimulus in 2009 did not work -- the counter is: it did -- it prevented a much deeper recession, and had the stimulus been as large as what Krugman -- and many other economists had wanted -- the U.S. economy would be growing at a much faster rate, and unemployment would be considerably below the current 8.1 percent level. The original fiscal stimulus -- given the depth of the downturn triggered by the bursting of the housing bubble and the ensuing financial crisis -- should have been well over $1 trillion -- ideally closer to $1.5 trillion, to get the economy growing at a better then 3 percent rate.

In other words, the 2009 fiscal stimulus package is working, did prevent a bigger national problem, and would have worked even better if it was larger.

What Ended the Great Depression? Government Spending For World War II

Conservatives often assert that fiscal stimulus did not work in the 1930s, but Krugman said the evidence refutes this contention. The U.S. government provided a massive amount of fiscal stimulus as part of the mobilization effort for World War II and the result was? A stupendous recovery and an enormous increase in GDP and real median incomes. And U.S. unemployment plummeted.

Another ruse forwarded by conservatives: that the current rise in U.S. unemployment is structural, i.e. that it stems from American workers lacking skills or who are otherwise unprepared for the workforce.

Wrong, Krugman countered, because if that was the case, only a few sectors would be experiencing high unemployment today. But since the financial crisis reduced payrolls, almost every sector -- save oil services -- is seeing a surplus of workers, skilled and lesser-skilled -- and that points to the problem of a lack of demand, Krugman added -- something fiscal stimulus can address.

A third supply-side canard, according to Krugman: that the high U.S. unemployment rate is caused by 'a lack of business confidence.' I.E. if we just cut income taxes on upper income groups again or cut corporate taxes, they'll be more capital to invest and business will become more confident and invest.

Wrong, Krugman countered, because the problem plaguing the economy is not a lack of capital -- the nation is awash in investment capital and so much of it is not being deployed that real interest rates are negative, after considering inflation. The 10-year U.S. Treasury note pays a whopping 1.74% -- a low rate that reflects not a lack of supply of capital, but a lack of demand, or what economists call aggregate demand -- something, again, that fiscal stimulus can address.

Moreover, the GDP growth equation points to an answer that supply siders and conservative should see, Krugman said. Amid tepid consumer spending, and sluggish business investment, a spending cut in the last sector remaining to provide stimulus -- the public sector - should result in what economic condition?

You guessed it: sluggish growth at best, and a recession at worst. And that's exactly what austerity has resulted in across the pond, in the United Kingdom.

GOP: Repeating The Mistakes Of 1930s GOP

Don't misunderstand, Krugman does not favor fiscal stimulus all the time, everywhere. There are instances when the federal budget has to be balanced and stimulus avoided.

But the theory that one should substantially cut government spending during a period of high unemployment and amid tepid demand conditions is absurd, Krugman said, adding that today's Congressional Republicans -- and prospective 2012 GOP presidential nominee Mitt Romney -- seem to have forgotten the lessons of the Great Depression of the 1930s.

Further, today's Republicans have a particular disdain for government spending, in spite of the overwhelming evidence of its necessity when consumption and business investment are deficient, and in spite of the overwhelming evidence of the good it can do. Why is that?

Krugman said part of the reason is a scholarly dispute among academic economics professors, and part of it is fear of that very good and essential service fiscal stimulus can provide.  I.E. conservatives -- many of whom run corporations -- fear the U.S. government's ability to create jobs, generate commerce, achieve social goods, and create a more-perfect union.

In other words, supply siders and conservatives appear to be obstinately glued to a discredited ideology, even when it hurts the American people and the nation.

And that's a stance the American people should not tolerate.


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