Stimulus may soften, not end, recession
The most optimistic estimates foresee shaving two percentage points from joblessness rates.
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Its total cost is now over $800 billion and could top $1 trillion by the time the Senate finishes with it.Skip to next paragraph
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That doesn’t mean he opposes it. The bill “will provide a vital boost to the flagging economy,” Mr. Zandi told the House Budget Committee on Jan. 27.
Zandi agrees that the bill will create 3 million jobs. Without it, the unemployment rate would rise into the double digits – and not sink to 5 percent, the level economists consider full employment, until 2014.
Absent a stimulus package the economy would contract by 3.4 percent for 2009, according to Zandi’s figures. If the bill passes, the GDP would shrink 2.48 percent.
Without a stimulus, the recession would continue into 2010, with further GDP contraction of 1.4 percent. With it, the economy would stabilize next year, in Zandi’s view, and end 2010 in positive growth.
“The stimulus will not keep the downturn from becoming the worst since the Great Depression, but it will ensure that it remains a recession and not a depression,” concludes a Moody’s Economy.com analysis.
A slightly different way of viewing the stimulus is to judge how well it would close the gap between the nation’s potential GDP and its actual performance, according to CBO’s Mr. Elmendorf.
The potential GDP is the level at which the US would be producing if the nation was at full employment, its capital resources were fully engaged, and factories and offices were working on an even keel. The actual GDP is what really happens.
Without a stimulus, the gap between the two would be almost $1 trillion in 2009, and another $1 trillion in 2010, according to CBO figures. It would remain substantial into 2011.
CBO’s best-case scenario shows the stimulus package plugging about half that gap in 2009 and 2010 – that is, adding about $500 billion to real economic activity both years.
Even with the bill, according to CBO, the gap remains large in 2011 and beyond. Thus, “you don’t really want to have a policy that provides a lot of stimulus in 2010, and then goes away overnight,” Elmendorf told lawmakers.
How the government finances the continued spending is another issue – one that many fiscal conservatives are raising.
“We have not yet reached the point where skyrocketing debt levels have caused heightened concerns among investors in US Treasuries. If [Congress] wishes to avoid testing those waters, it should consider tying stimulus efforts with genuine steps toward long-run deficit reduction,” Kevin Hassett, director of economic policy studies at the American Enterprise Institute, told Congress Jan. 27.