Thursday, August 25, 2011

How Much Does Bad Government Cost You?

Well, if you are an American, your government is now costing you $5 trillion.

Yes, that is the output lost from the US economy that results from the botched handling of the 2008 financial crisis.

Here's a post by Paul Krugman in his NY Times blog that gives the details:
Five Trillion Dollars

A couple of notes on the most recent Congressional Budget Office Projections:

1. They offer a portrait of an economic catastrophe. Here’s the CBO estimates of potential real GDP — the amount the economy could produce without causing inflationary pressure — and actual GDP, in trillions of 2005 dollars per year:

Click to Enlarge

No, I don’t know where that recovery in 2015 is supposed to come from; my guess is that it’s basically the CBO unwilling to project a depressed economy more or less forever. But even with that bounceback assumed, the projection says that we’ll have a cumulative output gap of $5.1 trillion, with $2.8 trillion of that having already happened.

Surely it would have been worth making an extraordinary effort to avoid this outcome. In particular, an $800 billion stimulus, a significant fraction of which was stuff that would have happened anyway (like extending the patch on the alternative minimum tax) looks ludicrously underpowered. Yet policy has been timid and conventional.

2. The CBO also projects unemployment staying above 8 percent until late 2014 — again, with no clear explanation of why it should fall sharply in 2015. This translates into a human catastrophe for the long-term unemployed. It also says that there will be no good reason to raise interest rates for the foreseeable future.

I think if you had told people back in, say, 2007 that this would happen, they would have asserted with confidence that generating a faster recovery would be at the top of the political agenda. The fact that it isn’t — that deficits are still dominating the conversation, even as interest rates plumb record lows — is truly remarkable.
What I can't believe is that Americans would put Obama back in power given his lousy track record on the economy. I find it even more incredible that they would put one of the idiot Republicans into power, the same party that created the current mess, and a party that continues to mouth insanity as "economic policy".

In short, the American people are screwed. There is no guy in a white hat who is going to come riding into town to save them. they have a lost decade and the only question is whether it will be a lost two or three decades. Tragic.

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