Some Reaction to Obama’s New Stimulus Plan

Obama’s new stimulus seems a step in the right direction. The private sector needs more government fiscal expansion to help it in its deleveraging. But unless the underlying problems – a crippled financial system, private sector balance sheets in a terrible state, and excessive private debt – are dealt with properly, stop-and-go mild to moderate stimulus packages like this (which are insufficient to create full employment) will be necessary for a decade or more.

America is turning Japanese – and by that I mean it is headed for a lost decade, a period of slow growth, high unemployment, deleveraging, and debt deflation. Outright depression will only be avoided by the role of government in maintaining aggregate demand. The situation will be made much worse if and when serious austerity is implemented in the coming years, as, for example, in Japan from 1996–1997, when Ryutaro Hashimoto turned to contractionary fiscal policy, plunging the country back into outright recession (and at the time of the East Asian financial crisis too).

Some quick links below on reaction to the stimulus

(1) Caren Bohan and Laura MacInnis, “Obama unveils jobs creation package,” Independent, 9 September 2011.

(2) Paul Krugman, “Setting Their Hair on Fire,” September 8, 2011.

(3) Bill Mitchell, “It is Easy to Create Jobs,” Billyblog, September 9, 2011.

(4) Gwendolyn Mink, “About That Payroll Tax Cut,” September 9, 2011.

(5) L. Randall Wray and Stephanie Kelton, “What the Country Needs Is a New New Deal,” September 8, 2011.

In particular, L. Randall Wray and Stephanie Kelton in the last link show what is really required to create full employment in America: a massive and direct jobs creation program by the government and large-scale fiscal stimulus.

It can’t be stressed enough that a Post Keynesian or MMT solution to the current woes would be far more radical than anything Obama has proposed.

Post Keynesians in particular support some very severe reorganisation of the financial sector and re-imposing effective financial regulation. Much of the burdensome private debt saturating private households in the US should be written off or re-structured.

James K. Galbraith on Obama, Social Security and the Debt Ceiling

This is an interesting interview with James Galbraith, and covers quite a few issues. With the debt ceiling issue now becoming a looming disaster if Republicans have their way, Galbraith alerts us to the fact that Obama’s Democratic party and especially its leadership have long since ceased to be progressive on economics.

An important point is that the US financial sector will also suffer badly if the debt ceiling is not raised, and they will probably pressure the Republicans to make some deal: will the Republicans bow to the same powerful interests who fund them and the Democrats?