Saturday, January 17, 2009

Monopoly Money

This week's issue of Rolling Stone features an open letter from Paul Krugman to Barack Obama. In it, Krugman outlines the case for a mammoth stimulus package:
How much spending are we talking about? You might want to be seated before you read this. OK, here goes: "Full employment" means a jobless rate of five percent at most, and probably less. Meanwhile, we're currently on a trajectory that will push the unemployment rate to nine percent or more. Even the most optimistic estimates suggest that it takes at least $200 billion a year in government spending to cut the unemployment rate by one percentage point. Do the math: You probably have to spend $800 billion a year to achieve a full economic recovery. Anything less than $500 billion a year will be much too little to produce an economic turnaround.
Krugman advises sitting down before listening to the price tag; I had to go get a beer.

No one can really visualize the vast sums of money currently being discussed. Our brains didn't evolve to deal with numbers larger than hundreds, or maybe thousands. But public spending is orders of magnitude higher. So how much is the nearly $1 trillion package Krugman suggests? According to Barbara Kiviat, a stack of 1 trillion dollar bills would reach a quarter of the way to the moon.

And yet, Krugman articulates a compelling case for such a large stimulus package and helps put the gargantuan sums into perspective:
It's possible that reviving the economy might cost as much as a trillion dollars over the course of your first term. But the Bush administration wasted at least twice that much on an unnecessary war and tax cuts for the wealthiest; the recovery plan will be intense but temporary, and won't place all that much burden on future budgets. Put it this way: With long-term federal debt paying the lowest interest rates in half a century, the interest costs on a trillion dollars in new debt will amount to only $30 billion a year, about 1.2 percent of the current federal budget.
In fact, Krugman is being conservative with his estimate on the war in Iraq.  Joseph Stiglitz puts the total cost of the war (including indirect costs) at $3 trillion.  I don't know that that completely alleviates my sticker shock, but it helps.   

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