Krugman is getting close to the edge

[cthulu2016]

36. This is not a popular observation, but

I think Bush's fiscal policy was very stimulative. It was not as stimulative, dollar for dollar, as any other use of the same deficit. Tax cuts for the rich and war are sub-optimal stimulus. But you can't run up a Bush size deficit without goosing the economy a fair amount.

Bubbles take down whole economies. The tulip bubble, the south seas bubble, the 1920s stock market, Tokyo real estate, the internet stock bubble, the housing bubble.

These events demolish economies, for a long time.

The internet bubble was, at the time, the biggest bubble in the history of money. I expected it to take the US economy down at least as hard as 2008 did. By all rights it should have.

But Bush wasted so much money on nonsense that the Keynesian spillover (which Bush probably does not even belivve in) kept the situation from rolling off the table. I didn't fix things, of course... employment was for shit, but the 9/11 interest rate cuts, the massive war spending and the low taxes for the investor class (particularly capital gains. Income tax is a side show) and lingering fake-ass internet bubble money were enough to pump up the housing bubble.

Consider this... Major bubbles are generational events. A bubble burst burns people so badly they lose thier bubble fever for a good long time. How on earth could the biggest bubble in history (in real dollars) collapse and then another equally dumb and perhaps even larger bubble develop only four/five years later in the same economy?

That's impossible, isn't it?

So I do not think the internet-era stock market sell-off was really the decisive resolution of the asset bubble. It wanted to collapse but more kind of deflated in a surprisingly orderly way, and did not send 100% of the bubble money to money heaven where it belonged. 2000-2001 should have been 1929, or at least 2008-2009, but wasn't.

The moving asset bubble didn't stop with real estate. Remember the moves that oil and gold and other commodities made in mid-2008 as housing was starting down? The bubble psycholgy was not broken in 2001. People continued to expect 20% annual returns.

The fact the internet bubble merely deadened the economy and kept employment flat has to be a fluke of the Bush tax cuts, the wars, Medicare D... the whole Bush blow-out.

None of this is to praise Bush, for several reasons.

1) He didn't have a clue. The grotesque deficit was meant to transfer wealth from poor to rich, not to prop up the economy. And the Republicans do not propose tax cuts for the rich for any economic purpose. The Bush tax cuts would have been proposed in any economic environment.

2) The deficits were just about the least optimal stimulative use of that size borrowing. Think what we could have done with infrastructure versus billions to murder a bunch of Iraqis as an election stunt. Think what we could have done with health care or hiring with those missing billions in tax revenue. It was massive stupid stimulus and unforgivable on that score. And,

3) Saving us from a bubble collapse by feeding the tension into and even more destructive bubble that takes down the whole shee-bang is hardly anything to brag about.

But all in all, when the biggest bubble ever bursts and terrorists blow up wall street and you've got a massive real estate bubble only a little time later it suggests something was keeping the house of cards propped up. And when that all coincides with moving from a budget surplus to the biggest deficits ever in a very short time that's a logical place to start looking for why.