Monday, August 17, 2009

Stimulus: Making the Recession Longer

The news this week that France and Germany grew at a 1% rate in the second quarter - ending the recession there - was surprising to many, but not so much to Global Review. After all, France and Germany did the least of all the major countries to "stimulate" their economies, despite heavy pressure from U.S. policymakers to drink the Kool Aid and join the stimulation orgy. James Taranto sets it up perfectly, with former economist and Nobel prizewinner Paul Krugman as the fall guy:
* "There's a problem: conservative politicians, clinging to an out-of-date ideology--and, perhaps, betting (wrongly) that their constituents are relatively well positioned to ride out the storm--are standing in the way of action. No, I'm not talking about Bob Corker, the Senator from Nissan--I mean Tennessee--and his fellow Republicans. . . . I am, instead, talking about Angela Merkel, the German chancellor, and her economic officials, who have become the biggest obstacles to a much-needed European rescue plan."-- Paul Krugman, New York Times, Dec. 15, 2008

* "Why is Europe falling short? Poor leadership is part of the story. European banking officials, who completely missed the depth of the crisis, still seem weirdly complacent. And to hear anything in America comparable to the know-nothing diatribes of Germany's finance minister you have to listen to, well, Republicans."--Krugman, New York Times, March 16, 2009

* "The European economy bounced back with unexpected strength in the second quarter, buoying hopes that a worldwide recession was drawing to a close. The sharp improvement from the first quarter underscored just how far Europe and indeed the global economy had come since a harrowing free fall in late 2008. Underlying the strong reading were solid performances in France and Germany, each of whose economies grew slightly in the second quarter, according to government data released Thursday."--news story, New York Times, Aug. 14, 2009
Japan, which did have a large stimulus package, grew very slightly in the second quarter, so the correlation isn't perfect. But it's certainly inconsistent with the facts to claim - as Krugman, Obama, and Christina Romer do - that government stimulii shorten recessions.

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