Obama's Stimulus Package, Paul Krugman and the CBO

Today's NYT carries a column by recent economic Nobel Prize winner, Paul Krugman (Krugman writes a regular column for the NYT, as well as teaching at Princeton). Krugman's column criticizes the Obama economic plan as basically being too small to close the growing gap, brought on by the recession, between potential supply and real demand. Krugman's observation is largely based on yesterday's report and testimony by the CBO, or Congressional Budget Office.

Having watched the CBO hearing, I understand Krugman's concern, on its face. About the only positive aspect of the testimony was the name of the witness, the Acting CBO Director, Mr. Sunshine (I kid you not).

A smiling Mr. Sunshine, exhibiting rare wry humor and the appropriate power point presentation delivered little more than doom and gloom in substance. It was an apt follow-on to the Three Stooges press conference of yesterday and illustrates a facet of modern America that I've been complaining about for years...process over substance, or in these instances, presentation over message. It's sort of like the world's foremost scientists gathering before a Congressional Committee and testifying that the world will end in a week and the committee members walking away afterwards saying to one another: "damn fine presentation."

Hello...the sky is falling.

Aside from that however is my own observation that may offset Mr. Sunshine and Professor Krugman's concerns, i.e. the validity of the supply side potential and its significance to the overall U.S. economy relative to overall consumer demand. What this boils down to is the suggestion that an economy based on overextended credit and foreign imports isn't exactly a great goal to set for the post recession world. Rather than getting back to achieving our "full potential," as defined by the old rules (i.e. creating consumer demand) it may be more important to spend some time discussing exactly what that potential really is and to offer an explanation for the "demand side" in terms other than Wal Mart's quarterly sales figures.

In other words, two major points: 1) When we get through this and strip the economy of its over leveraging, largely phony financial instruments based on overvalued assets, and begin paying more attention to fundamental trade balances, manufacturing jobs and neglected infrastructure we may find we have a sounder, but smaller economy. 2) Given 1), the actual size of the stimulus package necessary to return us to the Land of Oz is largely irrelevant and that instead of searching for a way to the Emerald City, we should be looking for a way to get back to Kansas. Temporarily, this may not be good for the U.S. economy within the context of our position within the overall global economy, but may be better for the average American and consequently, in the long run, good for our economy.

In sum, the future of the American economy can't really be compared to its status/position over the last several decades while we were incrementally moving toward an unsustainable situation. The Obama stimulus package and the Bush Administration moves since the "emminient collapse" and initial bailouts are indications of a slow, but growing awareness that we cannot simply go back to a situation that repeats the errors of the past, which have been similar to building a foundation with half the bricks that are prudent and necessary to sustain the structure.

Supply and demand require measurements that go beyond retail sales and consumer consumption. Given Krugman's basic Keynesian philosophy, his concern regarding these outmoded measures is curious.