Paul Krugman puts the pipsqueak stimulus in context:
[C]onsumers suddenly increased their savings. ...The $1.5 trillion stimulus package - the one that Larry Summers refused even to present to President Obama - and it's Obama's fault for appointing Summers, whose foremost attribute is undeserved arrogance (though he thinks it's brilliance) - would have filled 75% of the demand gap. We wouldn't have 9% unemployment if Obama had taken this case to the people:
[Y]ou have a negative shock on the order of 6 percent of GDP.
Against this you had a stimulus bill of $800 billion — except $100 billion of that was AMT extension that was going to happen anyway, another $200 billion was other tax cuts of dubious effectiveness, so you were left with $500 billion of spending, spread over more than 2 years — maybe 1.5 percent of GDP or less.
It just wasn’t big enough to do the job.
- It's free to borrow money.
- The best way out of recession is to grow.
- We're going to build useful infrastructure that we and our children will benefit from for the next 30 to 60 years.
- This will heal unemployment, which will take much of the pain - and there will be some pain - out of repaying the debt.
The paradox of thrift is the textbook example of the fallacy of composition in Keynesian economics. Behavior that's good for an individual or a family makes a recession worse. Money that's saved - not because people suddenly became virtuous but because they are fearful about the future - is money that's not spent. Since it's not spent, businesses have to contract their economic activity. They may be sitting on big profits (sound familiar?), but there's no reason at all for them to build more capacity, much less to hire unemployed workers.
Only the government, acting on behalf of all of us, can break this vicious cycle with deficit spending. And again, borrowing money is as close to free as it has ever been in history.
