[This is from his NYT blog, as opposed to his column]
http://krugman.blogs.nytimes.com/2008/01/24/why-worry-about-a-poor-stimulus-plan/
January 24, 2008, 7:28 pm
Why worry about a poor stimulus plan?
So the stimulus plan agreed to by House Democrats is a real piece of,
um, bad legislation. It could have been even worse -- it could have
been the plan Bush wanted, which would have delivered virtually no
stimulus at all. But it's very, very weak.
But why worry, aside from the big waste of funds? Because there's a
real chance that we'll be very sorry that we didn't get a serious
stimulus plan.
This plan leaves recession-fighting entirely up to the Fed. And as I've
pointed out before on this blog, the Fed may not have enough
ammunition.
People say that the last recession was brief and mild. But that's an
artifact of the way the NBER defines recessions -- basically as periods
when everything is going down. Once something starts going up (usually
GDP), it's labeled a recovery. But in the last two recessions the thing
that matters most -- employment -- kept falling long after the official
end of the recession.
[CHART: Did the last two recessions really end quickly?]
And in the last two recessions the Fed kept cutting interest rates long
after the recessions were supposedly over -- all the way down to just 1
percent in 2003:
[CHART: The Fed didn't think the recessions were over]
Indeed, as Alan Greenspan has revealed, the Fed still feared the
possibility of "corrosive deflation" well into 2003.
What finally created a convincing recovery was the housing boom. But
that turned into a bubble, which has burst big time.
We don't know for sure by any means, but it definitely looks possible
that this slump will be worse and more persistent than 2001-2003. And
housing won't come to the rescue this time. Meanwhile, the Fed has less
room to cut: interest rates can't go below zero (banks will just sit on
cash rather than lend money out at a negative rate), and they started
lower this time than they did in 2000.
The bottom line is that Ben Bernanke could definitely use some fiscal
wind at his back. But thanks to the lousy deal announced today, he
won't get it.