Wednesday, July 28, 2010

Not Just The Math, The Plan

Krugman says "we" knew the stimulus wasn't big enough because of the math. You know who else knew the stimulus wasn't big enough? Larry Summers.
The best estimate for the output gap was some two trillion dollars over 2009 and 2010. Because of the multiplier effect, filling that gap didn’t require two trillion dollars of government spending, but Romer’s analysis, deeply informed by her work on the Depression, suggested that the package should probably be more than $1.2 trillion. The memo to Obama, however, detailed only two packages: a five-hundred-and-fifty-billion-dollar stimulus and an eight-hundred-and-ninety-billion-dollar stimulus. Summers did not include Romer’s $1.2-trillion projection. The memo argued that the stimulus should not be used to fill the entire output gap; rather, it was “an insurance package against catastrophic failure.”

I have no idea why someone who thought stimulus would be effective would think that a too small "insurance package" was a good idea, but we fix the economy with the awful rulers we have not the ones we want.