Paul Krugman: On the Inadequacy of the 2009 Stimulus [View All]

[Better Believe It]

On the Inadequacy of the Stimulus
By Paul Krugman
September 5, 2011

So here’s the thing: the financial crisis, and in particular the popping of the housing bubble, had two big effects on spending. One was that housing investment plunged from well-above-normal to well-below-normal levels. The other was that consumers suddenly increased their savings. Here’s a picture, with the red line showing residential construction as a percentage of GDP and the blue line showing the personal savings rate:



Put these together and you have a negative shock on the order of 6 percent of GDP.

Against this you had a stimulus bill of $800 billion — except $100 billion of that was AMT extension that was going to happen anyway, another $200 billion was other tax cuts of dubious effectiveness, so you were left with $500 billion of spending, spread over more than 2 years — maybe 1.5 percent of GDP or less.

It just wasn’t big enough to do the job.

http://krugman.blogs.nytimes.com/2011/09/05/on-the-inadequacy-of-the-stimulus/