Too Small By Design

Whenever the subject of "too small" stimulus comes up, somebody chimes in and says that anything bigger couldn't have gotten through Congress. That might be true, though in my opinion even if it was true the administration should have made the case for a bigger stimulus and then grudgingly accepted "the best they could get." It would have made it easier to come back for more if necessary, which it obviously is.

But we know that the stimulus wasn't simply too small because of politics, it was too small by design.

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.” At the meeting, according to one participant, “there was no serious discussion to going above a trillion dollars.”

Krugman says this was what he was thinking:

For what the Committee to Save The World did in the Asian crisis was … not much. Some emergency loans to ease liquidity problems, some declarations that they were highly confident, a bit of interest-rate cutting; and once the panic was over, things recovered pretty much on their own.

Hence the view that fiscal stimulus was just an insurance policy, that the big thing was to stop the economy’s headlong descent, and then unemployment would come down mostly of its own accord.