Paul Krugman believes (and I am convinced) that the reason we are still in a recession is because of depressed demand. Consumers have stopped borrowing and slowed spending and so there is excess supply of consumer goods and excess business capacity. He therefore believes that we need expansionary policy. Monetary policy won't work because we are up against the zero bound on interest rates. So we need fiscal stimulus - which is hopeless since Democrats aren't even making that pitch.
As we see the from recent job numbers, small gains get a positive reaction. It frustrates me that we could do so much better if there was some urgency. Instead, getting below 8 percent unemployment by 2013 seems acceptable. Way too often government and the public accept suffering of segments of our society - more often less visible segments.
But my real question is this: if the problem facing businesses really is excess supply and unused capacity, why are businesses okay with Republican calls for austerity and budget cuts? Krugman believes that we need government to expand to make up for the cuts in consumer spending and to help consumers spend. Republicans are saying the real problem is taxes - or at least tax uncertainty.
On its face, the Republican point seems absurd. There is almost no talk of tax increases, so that can't be the reason businesses are not hiring.
But if Republicans are wrong and Krugman is right, why aren't businesses calling for fiscal expansion? Reports from the Chamber of Commerce say the biggest problem is excess supply. Are the businesses acting against their interest in support of ideology? Or is Krugman (and me) wrong? Or are businesses content with the meager growth if it means smaller government?
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