Monday, January 4, 2010

The Kroog Versus 1937

Paul Krugman warns that 2010 is starting to look a lot like 1937, a year where statistical good news about the economy caused FDR to pull the plug on stimulus projects...and immediately plunged the economy right back into the Great Depression.

So the odds are that any good economic news you hear in the near future will be a blip, not an indication that we’re on our way to sustained recovery. But will policy makers misinterpret the news and repeat the mistakes of 1937? Actually, they already are.

The Obama fiscal stimulus plan is expected to have its peak effect on G.D.P. and jobs around the middle of this year, then start fading out. That’s far too early: why withdraw support in the face of continuing mass unemployment? Congress should have enacted a second round of stimulus months ago, when it became clear that the slump was going to be deeper and longer than originally expected. But nothing was done — and the illusory good numbers we’re about to see will probably head off any further possibility of action.

Meanwhile, all the talk at the Fed is about the need for an “exit strategy” from its efforts to support the economy. One of those efforts, purchases of long-term U.S. government debt, has already come to an end. It’s widely expected that another, purchases of mortgage-backed securities, will end in a few months. This amounts to a monetary tightening, even if the Fed doesn’t raise interest rates directly — and there’s a lot of pressure on Mr. Bernanke to do that too.

Will the Fed realize, before it’s too late, that the job of fighting the slump isn’t finished? Will Congress do the same? If they don’t, 2010 will be a year that began in false economic hope and ended in grief.
Krugman's problem is that he doesn't realize Republicans in Congress very much want to see exactly that happen.  If there's positive GDP growth numbers in February for Q4 2009, then there's going to be enormous pressure to cancel the stimulus and use it to pay down the national debt instead, all but guaranteeing a nasty spike in unemployment just before the November elections.

We've already established time and time again Republicans are willing to wreck the country in order to con voters into giving them the keys to the kingdom again.  This is no different.

The question is, will Obama fall for it?

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