What Should We Have Known About Fiscal Stimulus? by Krugman

I’ve noticed a number of people arguing that the original Obama stimulus was underpowered because at the time nobody realized how deep a hole the economy was in. And it’s true that revised GDP numbers have shown that the 2007-2009 recession was even deeper than we thought. But the basic line of thought here is wrong: there was plenty of information in January 2009 indicating that the economy needed a lot more help than it was about to get.

First, even in January 2009 the CBO was forecasting an “output gap” — a shortfall of the economy’s actual production over what it could and should be producing — of more than $2 trillion over 2009-2010. That told you right there that an $800 billion stimulus, much of it consisting of tax cuts of dubious effectiveness, was likely to fall short.

There were also good reasons to believe that the slump would be prolonged, that the economy would need help over a protracted period.

After all, the two previous recessions had been followed by long periods of jobless recovery, and there was every reason to expect a repeat. Moreover, we had international evidence showing that the aftermath of financial crises is a long period of high unemployment.

The point is that even in January 2009 it should have been obvious that the economy probably needed a really major push. Maybe that wasn’t possible politically; but it’s clear that there was a complacency in the White House that remains very hard to understand.