Whitney, Krugman: Government Needs to Do More

While the economy has been showing signs of life in recent months and the stock market is now more than 50% off its March low, two top economic minds are saying that we’re far from out of the woods.

In an Op-Ed piece for The Wall Street Journal today, Meredith Whitney — the banking analyst who warned about the credit crisis — offers a new warning: “Anyone counting on a meaningful economic recovery will be greatly disappointed,” she says. “I follow credit, and credit is contracting. Access to credit is being denied at an accelerating pace. Large, well-capitalized companies have no problem finding credit. Small businesses, on the other hand, have never had a harder time getting a loan.”

In The New York Times, meanwhile, Nobel Prize-winning economist Paul Krugman takes on those who say the improving economic news means it’s time for the government to switch from stimulation mode to budget-deficit-reducing mode. “No, it isn’t,” he says. “And the complacency now setting in over the state of the economy is both foolish and dangerous.”

While the government’s actions have helped avert a second Great Depression, Krugman says “all indications are that unless the government does much more than is currently planned to help the economy recover, the job market — a market in which there are currently six times as many people seeking work as there are jobs on offer — will remain terrible for years to come.”

Krugman says that lengthy periods of high unemployment could lead to a rise in child poverty, which evidence shows is likely to lead to long-term problems. And studies also show that recessions caused by financial crisis can have damaging long-term effects on an economy, if the crisis is not met with a strong short-term response.

“Can we afford to do more — to provide more aid to beleaguered state governments and the unemployed, to spend more on infrastructure, to provide tax credits to employers who create jobs?” Krugman asks. “Yes, we can. … Spending more on recovery and reconstruction would worsen the government’s own fiscal position. But … the true fiscal costs of supporting the economy are surprisingly small. You see, spending money now means a stronger economy, both in the short run and in the long run. And a stronger economy means more revenues, which offset a large fraction of the upfront cost.”

“I know more stimulus is a hard sell politically,” Krugman says. “But it’s urgently needed. The question shouldn’t be whether we can afford to do more to promote recovery. It should be whether we can afford not to. And the answer is no.”

Whitney, meanwhile, says that in addition to having harder times getting loans, small businesses are also having trouble getting credit cards. And, she says, the credit cuts are only about halfway done. Without access to credit, small businesses — which employ 50% of the U.S. workforce — can’t grow and often end up going out of business.

Whitney also says it is “especially disturbing how taxpayer dollars have supported ‘too big to fail’ businesses yet left small businesses unassisted and at a significant disadvantage.” She says the government needs to take steps to spur lending to small businesses, and says it should be careful of unintended consequences from credit card regulation overhauls, which could end up hurting the consumers they are supposed to help. “Main Street represents the foundation of this country,” she writes. “Reviving it should take priority over any regulatory reform or systemic overhaul.”

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