Monday, 1 December 2008
Shocking the U.S. Economy Back to Life
Now that the U.S. government has spent nearly $1.4 trillion to stabilize the financial system, economists and policy makers - and the president-elect - are trying to figure out how much must be invested in a stimulus package to stop the recession, and what that money should be spent on.
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Shocking the U.S. Economy Back to Life
By Louis Uchitelle
1 December 2008
NEW YORK: Now that the U.S. government has spent nearly $1.4 trillion to stabilize the financial system, economists and policy makers - and the president-elect - are trying to figure out how much must be invested in a stimulus package to stop the recession, and what that money should be spent on.
The size of a possible stimulus plan rises as the economy contracts. It is doing so now at a 4 percent annual rate, according to current estimates, or eight times greater than this past summer. Just offsetting that contraction requires an infusion of at least $400 billion, many economists calculate. And even that will not restore a healthy economy.
“The hope is that the next stimulus package will be large enough to move the economy from big negatives to zero growth,” said Mark Zandi, chief economist at Moody’s Economy.com. “That is the benchmark today: zero growth.”
President-elect Barack Obama has not stated what the stimulus plan might cost, though congressional leaders have cited figures upwards of $500 billion. Obama has given a hint, though. He speaks of a recovery that would generate 2.5 million jobs in the first two years of his administration. That would require not just zero economic growth, but a fairly robust expansion - a swing, in effect, from the present 4 percent contraction to a growth rate of 2.5 percent or 3 percent a year.
Achieving such a swing would mean adding nearly $1 trillion in annual output to the economy. The private sector normally does this, stepping up its spending as a recovery takes hold. But if that does not happen, the Obama administration would have to step in, via a stimulus package that generated the additional $1 trillion in output, most likely through a mix of government spending and tax breaks.
No policy maker or economist has as yet publicly suggested such a huge sum. Trillions of dollars is a commonplace reference in talking about the financial bailout, but not yet the stimulus. The debate instead revolves around the proper mix for a stimulus package - that is, the most effective combination of outright spending and lower taxes.
Prominent economists argue that more than 50 percent of the next package, whatever its size, should be devoted to spending - on public projects like highway and school repairs, and on items like food stamps and stepped-up aid to state governments to subsidize their spending.
As Zandi declared in testimony this month before the Senate Budget Committee, nearly every dollar spent in this fashion generates $1.50 or more in economic activity. Repairing a road, for example, means hiring workers who spend their new salaries at supermarkets, which in turn hire more store clerks and stock more groceries.
This “multiplier effect” is missing, however, when the stimulus comes as a tax break. A $750 billion stimulus package, devoted entirely to spending, would achieve, through the multiplier effect, the $1 trillion rise in output that the Obama administration apparently seeks in order to generate 2.5 million new jobs.
A stimulus devoted entirely to tax breaks, in contrast, would require the entire $1 trillion in rebates or lower taxes.
“The multiplier effect is clearly less than $1,” said Nigel Gault, chief domestic economist for Global Insight, “and perhaps as low as 30 cents if only some of the tax break is spent.”
The one stimulus actually enacted by Congress - a $168 billion package that President George W. Bush signed early this year - consisted entirely of tax breaks, mainly in the form of rebate checks mailed to millions of Americans.
Some of that windfall was saved or it was spent on imports rather than on goods and services produced in the United States. The latter adds to the nation’s economic output; the former does not, helping to explain why this first stimulus failed to arrest the economic contraction.
The problem with a stimulus package weighted heavily toward public spending is that there is a shortage of projects on which spending could begin in two or three months. The Economic Policy Institute, for example, has listed $360 billion in ready-to-go work, one-third of it highway and school repair. Zandi offers a similar estimate.
“Still,” Zandi said, “if you don’t pick a big enough number for a stimulus package now and you have to announce another number next year, people will say, ‘Oh, the stimulus didn’t work. What makes you think this one will?”‘
Until now, big numbers have been noticeably absent from the stimulus debate. The House of Representatives approved a $60 billion package in late September, sending it to the Senate, which has not voted on the measure. The House action was followed in mid-October by talk among the Democratic congressional leadership of upgrading the $60 billion to as much as $200 billion in a lame duck session.
And then a week ago, Senator Charles Schumer, the senior Democrat from New York, suggested that any package should be $500 billion to $700 billion.
“By our estimates,” Jan Hatzius, chief domestic economist for Goldman Sachs, said in a newsletter this week, “the private sector retrenchment could subtract an annualized 4 percentage points or about $600 billion from economic growth through the end of 2009.”
The financial-sector bailout does not address this decline. Rescuing banks and other lenders has little direct impact on economic growth or job creation. The chief goal of the bailout is to get credit flowing again from reluctant and damaged lenders.
The stimulus package, in contrast, puts up government money as a substitute for the spending and investment that is no longer taking place in the private sector - despite unusually low interest rates - so that the economy can grow again, or at least stop shrinking.
That makes the stimulus package ever more important if the economy continues to deteriorate at its present pace. Not since the first quarter of 1982, in the midst of a severe recession, has the gross domestic product contracted at a 4 percent annual rate in a single three-month period, as a growing number of forecasters say it is now doing, according to Blue Chip Economic Indicators.
In America’s giant $14.4 trillion economy, that means the output of goods and services has been declining by nearly $50 billion a month since September. Seldom since the Great Depression has something like that happened.
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