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Does the US need a second stimulus package?

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Submitted by Edward Harrison of Credit Writedowns.

Laura Tyson, an advisor to President Barack Obama, said in a speech to day in the lead up to the –8 conference that the ground work for a potential second stimulus bill must be laid now. To be sure, the G-8 leaders are expected to recommend continued policy accommodation worldwide. However, Vice President Joe Biden recently suggested that the Obama Administration has no plans for a second stimulus bill on the political TV show Meet the Press (transcript here).  So, which is it – stimulus or no stimulus?

The U.S. should consider drafting a second stimulus package focusing on infrastructure projects because the $787 billion approved in February was “a bit too small,” said Laura Tyson, an adviser to President Barack Obama.

The current plan “will have a positive effect, but the real economy is a sicker patient,” Tyson said in a speech in Singapore today. The package will have a more pronounced impact in the third and fourth quarters, she added, stressing that she was speaking for herself and not the administration.

Tyson’s comments contrast with remarks made two days ago by Vice President Joe Biden and fellow Obama adviser Austan Goolsbee, who said it was premature to discuss crafting another stimulus because the current measures have yet to fully take effect. The government is facing criticism that the first package was rolled out too slowly and failed to stop unemployment from soaring to the highest in almost 26 years.

Obama said last month that a second package isn’t needed yet, though he expects the jobless rate will exceed 10 percent this year. When Obama signed the first stimulus bill in February, his chief economic advisers forecast it would help hold the rate below 8 percent.

Unemployment increased to 9.5 percent in June, the highest since August 1983. The world’s largest economy has lost about 6.5 million jobs since December 2007.

Clearly, the economic situation is much worse than Obama’s team predicted back in January.  It is leading to rising unemployment and grim statistics on things like consumer default rates.  So, if the $787 billion stimulus package was based on a rosy economic scenario that never happened, it goes to reason that this stimulus bill was too small, as Laura Tyson argues.

Yet, some economists like Mark Zandi of Economy.com agree with Biden that we should take a wait and see approach (video below).

Of course, the wait and see modus could be a disaster as stimulus should take six to nine months to kick in.  If the economy falters in Q4, say, a stimulus might be forthcoming in Q1 2010 with effects coming on line late in 2010 – not a very good scenario for politicians in Congress looking to get re-elected.

So, which is it: stimulus or no stimulus?

Below are two takes on this question.

And, for the record, I don’t think Obama could get a second stimulus bill through Congress if he tried.

Source

Obama Adviser Says U.S. Should Mull Second Stimulus – Bloomberg

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward

18 comments

  1. ASmith

    Let’s now even consider another “stimulus” until they actually manage to spent the first “stimulus”. So far,less than 1% of the money budgeted in February for job creating “stimulus” has been spent.

    If Obama and the Democrats in Congress who put this last one together had been a bit more bipartisan, it would have been more stimulating. Of course, we will never know if that money taken out for Nancy’s condoms would have had a stimulating effect.

  2. Nick von Mises

    I suppose the obvious quibble – that to stimulate one part of the economy you have to unstimulate an other by at least the same amount – is lost in this debate?

    I suppose the free lunch is just sitting there on the table

  3. ronald

    We forget the Bush stimuli package last spring so we are already on stimuli two for this recession!

  4. anon

    Rather than throw money away, why not spend $1500 on every home owner and give their utilities money to upgrade to smart meters. This could save the average homeowner over $600-$700 in utilities plus start leading the way to have a smarter grid that will allow hybrids. Oh wait, that would make too much sense, instead let's just spend the money on pork barrel projects.

    These guys in the administration are a bunch of clowns and would bankrupt any company they worked for or ran in the real world.

  5. Bruce Krasting

    I you asked John Maynard Keynes he would say, "The Public sector must create demand equal to the drop in Private consumption."

    So what is that drop? In the 1st q we fell by a 'real' 1.5% or $$200b. But we are getting some of that back. Say we are down by 2% YOY. That would imply a stimulus of $300B. We are doing $400b in 09 and again in 2010. So it would seem that the present stimulus is about right.

    So why the talk for more? Simple, they want growth to return to trend line of 3%. That would require a total of an additional $400-500 billion. Possibly for two years.

    If we do not get growth back to 3% pretty soon all of those numbers regarding future entitlements are going to blow up in our face.

    One other thing, Keynes was very clear about about how to intervene to stimulate demand. He argued against infrastructure projects as a tool. They take too long to impact the ST economy and the pay back is too long. If Maynard was here today he would say, "Cut taxes".

    A one year exemption from payroll taxes would 'fix' the economy. It would also destroy the economics of the Social Security System. Maybe that should come on the table.

  6. Mara

    No MSM media wants to ask the question: why wasn't the stimulus "trickle up"? Some $12-15 trillion of guarantees and backstops would've handled the issue of underwater mortgages and darn near every credit card in the country. Instead, we have this massive future tax burden (to save the poor banks and derivatives holders) and a massively indebted population who will be pressed for crushing taxes for decades to come. Of course, if we trickled up, the crimes of the FIRE sector would have to be revealed and that's just unpalatable. So, to answer the question: Do we need another stimulus? The answer is "Not until you give it to the right people".

    As for Social Security being the root of all evil, I can think of many other sectors of govt that deserve a thorough trimming long before that is on the table (Pentagon, I'm talking to you). Let us not forget the decades long pillaging of the SS funds, replaced with IOUs. Of course, this is not addressed either.

  7. Hugh

    That the stimulus was "a bit too small" has got to be one of the great understatements of all time.

    When we look at the size of the stimulus needed we need to consider far more than the GDP. We need to look at the disparity between aggregate supply and demand. We need to look at state versus federal spending. We need to look the fall in employment. It isn't just 6.5 million jobs lost. There were another couple million needed to cover growth in the US population. So the shortfall in jobs from the start of the recession is more like 8.5 million. We also need to remember that even before the recession hit, Bush's job creation numbers had sucked for years. Conservative economists at the time were even trying to spin this as the new paradigm. Well, as in so much else, they were wrong about this too. We also have to look at all the wealth destruction in housing prices, in the stock market, and in people's 401ks. We need to factor in increased levels of saving which also reduces demand.

    Finally, we need to look at Obama's first stimulus. The $787 billion was over two years. It won't be spent equally in both. More is likely to go in the second year. But let's for the sake of argument split it 50-50. That's $394 billion a year. This in turn was split 60-40 between spending and tax cuts. Tax cuts are in stimulative terms neutral to negative. So we are really talking 60% of $394 billion or $236.4 billion. If we apply a stimulative factor of 1.4 to this we come up with something like $331 billion in stimulus effect per year for the two years of the stimulus. Now if you consider cutbacks in state funding of about $100-200 billion a year. You are looking at a net governmental stimulus of at most $131-231 billion. Does anyone think the mess we are in can be fixed with this?

    The truth is that we need a stimulus program in the $1-1.5 trillion range, not for a couple of years but for as long as needed. Can we afford it? Well consider that the government has already given the financial industry $6.788 trillion almost all of it in the last 9 1/2 months, and has pledged an equal amount to some $13.9 trillion. So the short answer is yes, we can afford it. But do our politicians have the visions, sense, and fortitude to do it? No. They are as stupid, cowardly, pig-headed a lot as a nation has ever been cursed with.

  8. Doc Holiday

    Hell yes we need another round of stimulation! The first few Trillion and the undisclosed amounts not disclosed have helped re-build America and just look at all the jobs created by Obama with round one….. so why would anyone object to round two and all the good it could do someone, like a bank CEO.

    "I think a second stimulus is an even worse idea than the first stimulus, which has been demonstrably proven to have failed. And we're — we're spending $100 million a day on interest on the first stimulus. Rush and spend is what this administration is about, rush and spend. This needs to stop for the future of our country and for our children and for our grandchildren."

    Senate Majority Leader Harry Reid agreed — sort of. He says there is no need for one, at least right now.

    "As far as I'm concerned, there's no showing to me that another stimulus is needed," Reid said.

    Full Fuc-ing Disclosure: The author should give a crap what was just pounded out on the keyboard and will continue to clean the garage and look for that bird that flew in the attic last week….

  9. skippy

    @docH said…will continue to clean the garage and look for that bird that flew in the attic last week…

    Hay just a thought, enlist the help of the neighbors cat, k.

    Skippy :-)

  10. Hal Horvath

    There is a type of stimulus that is missing, and would be easy to get through congress, and could be very rapidly implemented.

    The other sort — powerful incentives for the private sector to increase payrolls/create new jobs. It's actually quite easy to set up a sensible system that could not be gamed and would not distort sectors. I've written some about it at my blog.

    This isn't rocket science, especially for anyone that has run a business for a few years.

  11. Hal Horvath

    for instance, the incentives would depend on sustained increases in net payroll, and would attenuate over a long period, such as 5 years.

    About 5 basic principles like this makes it work well.

  12. skippy

    Re: rehab, don't forget it takes at least 6 months out side the previous environment, to have a chance.

    skippy…credit rehab lol the dealers have them cornered, can't pass wind with out repercussion to your credit score.

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