Once again, Krugman is proven correct

He was absolutely on the money when he warned in this January 2009 NYT commentary that Obama's initial fiscal stimulus package didn't go nearly far enough. One aspect of the damage of the Bush years can be measured in terms of its unpardonable fiscal profligacy, mostly thanks to stupid, misdirected tax cuts coinciding with stupid, expensive wars, which the White House tried to keep off the books at the time. From the Center on Budget and Priorities:

Just two policies dating from the Bush Administration — tax cuts and the wars in Iraq and Afghanistan — accounted for over $500 billion of the deficit in 2009 and will account for almost $7 trillion in deficits in 2009 through 2019, including the associated debt-service costs. (The prescription drug benefit enacted in 2003 accounts for further substantial increases in deficits and debt, which we are unable to quantify due to data limitations.) These impacts easily dwarf the stimulus and financial rescues. Furthermore, unlike those temporary costs, these inherited policies (especially the tax cuts and the drug benefit) do not fade away as the economy recovers.

The fiscal disaster that was Bush can also be assessed in terms of the budgetary things that went criminally unattended - and which were exacerbated by the tax cuts and wars. This was not nearly sufficiently appreciated by Team Obama. When the incoming Obama administration announced its budget plan at the beginning of 2009, Krugman warned:

Bear in mind just how big the U.S. economy is. Given sufficient demand for its output, America would produce more than $30 trillion worth of goods and services over the next two years. But with both consumer spending and business investment plunging, a huge gap is opening up between what the American economy can produce and what it’s able to sell.

And the Obama plan is nowhere near big enough to fill this “output gap.”

Earlier this week, the Congressional Budget Office came out with its latest analysis of the budget and economic outlook. The budget office says that in the absence of a stimulus plan, the unemployment rate would rise above 9 percent by early 2010, and stay high for years to come.

Grim as this projection is, by the way, it’s actually optimistic compared with some independent forecasts. Mr. Obama himself has been saying that without a stimulus plan, the unemployment rate could go into double digits.

Even the C.B.O. says, however, that “economic output over the next two years will average 6.8 percent below its potential.” This translates into $2.1 trillion of lost production. “Our economy could fall $1 trillion short of its full capacity,” declared Mr. Obama on Thursday. Well, he was actually understating things.

To close a gap of more than $2 trillion — possibly a lot more, if the budget office projections turn out to be too optimistic — Mr. Obama offers a $775 billion plan. And that’s not enough.

To repeat: this was written in January '09. Obama explicitly acknowledged Krugman's warnings, and greeted them with extraordinary condescension:

"If Paul Krugman has a good idea, in terms of how to spend money efficiently and effectively to jump-start the economy, then we’re going to do it. If somebody has an idea for a tax cut that is better than a tax cut we’ve proposed, we will embrace it . . . Just show me. If you can show me that something is going to work, I will welcome it."

In other words, no matter what you've shown me, you haven't shown me.

Two years on, with the benefit of hindsight, it appears Krugman was dead-on.

Naturally, the pundits completely misinterpreted the implications of the Dems' 2010 mid-term election rout. About the election, as Krugman has more recently pointed out:

The real story of this election, then, is that of an economic policy that failed to deliver. Why? Because it was greatly inadequate to the task.

And here we are - with the tax-cut deal, Obama is doing little more than throwing a hail-Mary pass. In the mean time, we have the execrable Caldwell once again revelling in unreality in the FT with a bizarre interpretation of the facts on the ground but somehow coming up with the correct political diagnosis: the era of collusion between the main political parties in the United States is indeed probably coming to an end.

It is, however, too late. America is destined to move quickly from the world's only superpower to a highly influential member of the G-20. The new paradigm is upon us.