Op-Ed Columnist - The Real Story - NYTimes.com

This morning's unemployment report was initially greeted with enthusiasm by the stock market, although in thin pre-holiday trading.

I think the market was surprised by the massive upward revisions in employment for June and July, since it is hard to get too excited about a 9.6% unemployment rate. Bonds predictably are getting hit, with yields on the Treasury 10-year "soaring" to 2.71%.

There are rumors all over the internet discussing the possibility that the White House will propose some sort of job stimulus package, perhaps in the form of a payroll tax "holiday". Whatever the proposal, if any, I doubt it will be very significant given the political climate in Washington.

Part of the problem is that there continues to be the steadfast belief that government spending and fiscal deficits are always bad, and will inevitably lead to inflation. While I would agree that this can sometimes be true, I think it is less likely in today's deflationary economy.

Which leads me to Paul Krugman's editorial in this morning's New York Times.

Professor Krugman notes the hysteria that accompanied the first stimulus package:

Those who said the stimulus was too big predicted sharply rising rates. When rates rose in early 2009, The Wall Street Journal published an editorial titled “The Bond Vigilantes: The disciplinarians of U.S. policy makers return.” The editorial declared that it was all about fear of deficits, and concluded, “When in doubt, bet on the markets.”...

...When in doubt, bet on the markets. The 10-year bond rate was over 3.7 percent when The Journal published that editorial; it’s under 2.7 percent now.

What about inflation? Amid the inflation hysteria of early 2009, the inadequate-stimulus critics pointed out that inflation always falls during sustained periods of high unemployment, and that this time should be no different. Sure enough, key measures of inflation have fallen from more than 2 percent before the economic crisis to 1 percent or less now, and Japanese-style deflation is looking like a real possibility.

Krugman has been steadfast in his belief that another massive stimulus package is needed, and that worries about inflation and debt are not nearly as important as the need to get the economy going again. My bet would be there will be no change in fiscal policy until after the November elections, but then most of the Bush tax cuts will be allowed to expire.

Op-Ed Columnist - The Real Story - NYTimes.com