US economy needs a second stimulus
The last stimulus package didn’t take into account the fiscal problems the recession would create for state and local governments.
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That means a robust recovery is not likely. Without strong consumption, strong investment is not likely.Skip to next paragraph
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In the 1997-98 crisis, when Korea, for instance, had this problem, it recovered by exporting what it made to the US and other places that could consume their products. But with Europe down and the US down, we can’t all export our way out of this crisis. Trade with Mars is still not big enough.
Part of the world – Asia – is recovering. But, dynamic as Asia is, its demand is too small overall to make up the shortfall that would lift the US out of recession through exports.
That leaves government to fill the gap. The US stimulus has made a difference. If we hadn’t had the stimulus, unemployment would be 11 or 12 percent. Yet, it was not big enough or well enough designed to bring employment back to normal levels.
One of the key failures of the stimulus package was that it didn’t take into account the fiscal problems the recession would create for state and local governments.
When tax revenues go down because of lost economic activity – falling housing prices, closed businesses, lost income from unemployment – budgets have to be cut back. Revenues at the state and local level in the US are down $200 billion this year. So, while the federal government has been increasing spending, state and local governments have been contracting.
This all will get worse with the end of the stimulus in 2011.
What to do? The US Congress has to pass a second stimulus. It also has to finally really come to grips with the mortgage crisis, which ignited the meltdown. This year we are expecting 2.5 to 3 million foreclosures.
Finally, banks must begin lending again, especially to small and medium-size businesses that create new jobs. This was the rationale for bailing out the banks – but it hasn’t worked.
There are still no constraints on the banks. They get almost 0 percent credit from the Federal Reserve, and what do they do? They look around the world for investment in the strongest economies – not the US but emerging economies like Brazil and China. And now that is creating a problem because they are getting speculative money that is creating bubbles there!
Fortunately, these countries have been through this crisis once already and have better banking regulations and monetary policies than the US. Brazil has already introduced restrictions on the inflow of capital, undermining globalization.
On banking regulation
The regulatory framework of banks is one of the key problems in the US today. Clearly, the current incentive system in banking institutions – for example the way bonuses are calculated and paid – encourages the very shortsighted risk-taking that brought us to where we are. Size is also a problem.
If banks that are “too large to fail” gamble with risk and win, they walk off with the profits. If they lose, the taxpayer picks up the tab.