Stimulus 2: Can more spending spur a recovery?

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

By

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.

"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.

Recommended: Business

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.

In contrast, economic advisers to Speaker Pelosi see considerable merits in a rescue package. Last week, she had a conference call with such prominent figures as former Treasury Secretary Lawrence Summers and Columbia University economist Joseph Stiglitz, among others. The conference callers hold that a recovery package will lessen the length and severity of the recession, Pelosi stated. "If we don't, the recovery will only get worse."

Members of the House, new and old, are scheduled to return to Washington Nov. 17 for party leadership meetings. There could be a lame-duck session of Congress to consider a rescue package if there is a possibility of agreement between the two parties and President Bush on details of a package. A small stimulus package passed by the House in September was blocked by Republicans in the Senate, says Pelosi's office.

Already, the Bush Administration and the Fed have taken a host of measures to restore liquidity to the financial system, with some modest success. But the trust essential to a smoothly working financial system has been weakened. Fearful banks have been hoarding cash in their reserves and remain reluctant to expand lending by much.

Reflecting this factor, one measure of the nation's money supply (M2) has grown at an annual rate of 11.75 percent in the 13 weeks to Oct. 13. That's "extraordinary," says Paul Kasriel, an economist at Northern Trust Co., Chicago. It's "very similar to dropping money from a helicopter" to a crowd below. Eventually, some cash will be spent. Yet Mr. Kasriel suspects it will "take a long time" to get the economy moving again.

Many measures are needed to limit damage from the recession, says James Galbraith, a liberal economist at the University of Texas, Austin. His list includes extension of unemployment benefits, raising Social Security pensions to partially offset losses in the investment accounts of senior citizens, a major program to help homeowners facing foreclosure, lower interest rates (done last week by the Fed), and federal financial relief to states and localities.

Finally, he advocates more federal spending on infrastructure – highways, bridges, etc. That's a popular idea on both left and right. Hoisington suggests even subsidizing nuclear power plants – a idea that's not politically correct, he admits.

Federal spending rather than tax cuts is the best way to get the most "bang for the buck," argue the Goldman economists. And "do it fast."

Share this story:

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...