The Failure of Fiscal Policy

As Paul Krugman points out in this post in his NY Times blog, it isn't that fiscal policy failed in the US, it was never tried!

... he [Obama] has effectively given up on the idea that the government can do anything to create jobs in a depressed economy. In effect, although without saying so explicitly, the Obama administration has accepted the Republican claim that stimulus failed, and should never be tried again.

What’s extraordinary about all this is that stimulus can’t have failed, because it never happened. Once you take state and local cutbacks into account, there was no surge of government spending. Here’s total (all levels) government spending over the past 10 years:

Looking at this graph, if you didn’t know there had been a “massive” stimulus, would you even have suspected that there had been any stimulus at all?

And yet the failure of the stimulus that never happened has become conventional wisdom — which is what I feared would happen, two years ago, when I was tearing my hair out over the inadequacy of the original plan.

Yes, I know, it’s argued that Obama couldn’t have gotten anything more. I don’t really want to revisit all of that; my point here is simply that everyone is drawing the wrong lesson. Fiscal policy didn’t fail; it wasn’t tried.

The tragedy is that 20 million Americans would not have had to suffer the loss of income, the unemployment, or the curtailed employment, imposed by the Great Recession if a real fiscal policy of stimulation had been tried. But as Krugman points out: dysfunctional politics in America means it was never tried. And to add insult to injury, the Republicans now declare that the last two years are "proof" that fiscal policy, a "simulus", failed. Nutty! But that passes for "politics" in the US.