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Stimulus 2: Can more spending spur a recovery?

Many economists agree another stimulus package is necessary. Some are skeptical about its benefits.

By David R. Francis / November 3, 2008

Both presidential candidates have called on Washington to come to the rescue of the economy with extra spending and tax cuts. Probably a large majority of economists agree that a stimulus plan is badly needed.

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"It pays to be bold," write two Wall Street economists, Jan Hatzius and Ed McKelvey of famed Goldman Sachs Group. They suggest a $300 billion to $500 billion package "to offset the sharp drop in spending relative to income by US households and business that is now underway due to the tightening of financial conditions."

That's much larger than what Democrats are contemplating on Capitol Hill. The biggest amount mentioned by House Speaker Nancy Pelosi so far is $150 billion.

Getting the economy on track won't be easy. The recession is probably already nine or more months old. It looks like it will get deeper and last many more months than that. At least that's the view of relatively pessimistic Van Hoisington, head of Hoisington Investment Management Co., in Austin, Texas.

"Time will eventually cause this storm to pass, and prosperity will return," he writes in a quarterly review, "but two or three years of economic difficulties are unprecedented in modern times."

Mr. Hoisington, in a telephone interview, expressed doubts about whether a congressional rescue package will reduce the severity and length of that slump.

For one thing, he calculates that by 2010, American households will have lost more than $7 trillion in real wealth from the decline in prices of homes and corporate stock. That, he figures, will put a brake on consumer spending for both domestic and imported goods.

Last week, the Bank of England figured that financial institutions in the United States, Britain, and the 15-nation euro area have already lost $2.8 trillion on investments in non-corporate-stock financial assets, such as bonds and mortgage-backed securities.

Another difficulty Hoisington notes is that total US debts – private and government – has risen to a 92-year record 356.7 percent of gross domestic product, the total output of goods and services in the US.

Last spring's tax rebate/fiscal stimulus package, Hoisington says, failed to spur economic activity. Only about 20 cents of each dollar mailed to the taxpayers was spent, with the remainder saved or used to lower debt.