Of course, 2007 Q3 would have been even better. Paul Krugman reaches the right conclusion in his column today, but he's more than a day late and at least a dollar short. The part he gets right is this:
No, what the economy needs now is something to take the place of retrenching consumers. That means a major fiscal stimulus. And this time the stimulus should take the form of actual government spending rather than rebate checks that consumers probably wouldn’t spend.
Why is he more than a day late? Because we should have begun planning the implementation back in January, when the first so-called stimulus package was passed.<!--break--> Are we happy with that tax giveaway now? It boosted consumption (though by less than it might have, for reasons Krugman accurately predicted here), and its principal effect on policy makers was to make 2008 Q2 GDP growth look better than it would have been and continue to give politicians more reason to delay a move to more sensible policies.
What we should have done back in January is to start planning for a future in which the consumers, finally, would sensibly retreat (not capitulate) from their debt-laced consumption rampage. Some people were suggesting the following in January:
[W]e can plan well in advance. The federal government has a critical role in maintaining and developing public infrastructure, whether in transportation, telecommunications or energy transmission projects. A sensible capital budget would include a prioritized list of projects that need attention. Some would be slated for this year, some for 2009 and so on, over the useful lives of the projects. When economic growth falters, the government would be in a position to move some of the projects from later years into the present year.
Had we started this nine months ago, the projects could be coming on line now. These would be capital projects that the country needs. (Read more here.) This is why Krugman is at least a dollar short. There is no particular virtue in using fiscal policy to boost consumption on the most marginal things that consumers want. This is what they cut back on in the third quarter of 2008. Since consumers were living beyond their means, this is a step that was eventually going to happen -- why delay the inevitable? (As an aside, I don't have any problems with some of the proposals that will boost consumption, like extended unemployment benefits. I just don't think that's the most critical aspect of the policy debate we should be having.)
That consumers have retreated means that the case for infrastructure and other capital spending projects is even more compelling, since factors of production (labor and capital) will be relatively underutilized and thus available to the government at lower costs. The trouble with our current position is that we haven't set up a prioritized list of where the spending should go. Everything we might do now will be the usual poorly planned, poorly executed pork-barrel projects.
We treat the long term as if it offers no more opportunity than a series of short-term, last minute activities. If we planned better, we could make our resources go further, and we wouldn't be subject to all of the panhandling from special interests wanting stimulus, bailouts, and rescues.