Does The Economy Need -- And Can We Afford -- Another Jolt of Stimulus?
This morning's Urban Institute discussion with Moody's Analytics Mark Zandi and Urban Institute Fellow Rudy Penner is well worth watching. Zandi recommended another stimulus bill of at least $200 billion, as Congress and President Obama have already embarked upon, and Penner questioned the "bang for the buck" of last year's stimulus and this year's additional stimulus. "The risk is that the politicians will put off the day of reckoning, but the world won't let us...There may be an Ireland in our future," Penner said.
Zandi sees between a 25% chance and a 33% chance that the recovery will stall late this year because of rising home foreclosures, commercial real estate failures, state and local government layoffs, and frozen bank lending. He noted that for the first time in history, in the third quarter of 2009, net credit in the United States declined. In other words, massive government borrowing was overtaken by private debt reduction. He warned, if housing prices resume their slide this year, "It's going to be a mess."
Penner said, "You can't ignore the pain out there." He recommended focussing on assistance for the poor and the unemployed and generalized aid to the states. In particular, he questioned the value of most energy and infrastructure spending because it takes so long to get spent. He would claw back such infrastructure funds which haven't been obligated yet. He admitted highway money has been spent faster than he expected.
Bottom Line: Zandi believes we can't take a chance that the recovery stalls, and Penner believes we need to spend less and to spend it more wisely.
Also check out Zandi's paper, "What Is Wrong With The Job market And How To Fix It."
Here are their bios.
Unemployment=Deficits
As long as unemployment is this high, the deficit can NOT be improved. Clinton ran surplus only after unemployment dropped to about 4%. Spend now to reduce unemployment and shift more people from net benefit recipients to taxpayers. Collect more revenue when people are working. Current deficits should be reduced by increasing taxes on idle capital, high income earners and large inheritances.
Employ labor now while labor is cheap. Cut back on labor when private sector demand for labor increases.
We should be running countercyclical fiscal policy. Bush blew a BIG hole by running enormous deficits in better economic times. Bush tax cuts for the wealthy did nothing to improve the labor market. The terrible Bush labor market was masked by the real estate bubble-generated construction boom. The labor market deteriorated significantly before this financial crisis hit which makes this recession far worse than it would be otherwise. Fix the labor market first.
Decifits are unsustainable
The problem is government spending. The government has been growing 3-6% a year regardless of cycles. It definitely has jumped significantly higher than that at times, but the government's budget has only gone one direction, up. We can't tax our way out of this and we can't grow our way out of this.
The timing can be debated, but the government's spending levels are completely unsustainable! The CBO is projecting $9 trillion more in debt over the next decade.
We don't need more government spending. It isn't working. Companies haven't hired, even though they are making profits. They realize the lift is due to the government and it is not real. Cash for Clunkers was merely a transfer of wealth. It didn't do anything for the long-term viability of the car companies.