The economic stimulus package: How does spending help?

A reader wonders why government is attempting to spend its way out of an apparent recession.

from the February 4, 2008 edition

Page 2 of 2

Page 1 | 2

"At least we tackle that problem when the economy is growing, not declining," says Bluestone. "It's a timing problem."

Certainly, the 80 percent of Americans who have seen no increase in their real income for the last five years will benefit from the fiscal stimulus, Bluestone says. Many "working stiffs," he says, will spend their tax rebates.

The impact of a recession on people is nothing to sneeze at. Fearing the political and economic consequences, Congress and President Bush, Democrats and Republicans, have managed – so far – to agree on a fiscal stimulus package.

Should the present slump worsen into a real recession, economists John Schmitt and Dean Baker predict that the labor market will suffer for about the next three years (as happened in the economic downturns of the early 1990s and 2000s). The problem might last four years if a recession is as bad as the 1980-82 dive. The latter was the worst downturn since the Great Depression of the 1930s. If the recession is modest, the national unemployment rate could rise 2.1 percentage points to 6.7 percent through 2010, adding 3.2 million people to the rolls of the jobless. If the downturn is more severe, the unemployment rate might soar to 8.4 percent by 2011, with 5.8 million more Americans unemployed.

Depending on its severity, a recession could add 1.6 to 3.5 percentage points to the 2006 poverty level of 12.3 percent, calculate Mr. Schmitt and Mr. Baker, both from the Center for Economic and Policy Research in Washington. Further, a mild-to-moderate recession would reduce the median family income by some $2,000 a year and leave an additional 4.2 million individuals without health insurance.

Considering the potential damage of a recession, the Federal Reserve decided to cut a key interest rate a further 0.5 percentage points last Wednesday.

But not all economic seers are gloomy. One optimist, Brian Wesbury of First Trust Portfolios in Lisle, Ill., told a congressional committee last week that since 1982, the economy has been in recession only 5 percent of the time, whereas between 1969 and 1982, the US was in recession roughly one third of the time. He called attention to that 1980-82 recession when both unemployment and inflation exceeded a 10 percent annual rate. The 30-year mortgage rate rose to 18.5 percent when then Fed president Paul Volcker braked the economy hard to stop what was called "stagflation."

Most economists don't expect anything as bad this time around.

1 | Page 2