Stimulus goes global. Will it be enough?

"How much room is there for more fiscal stimulus? Probably not much," says Simon Johnson, former chief economist at the International Monetary Fund and currently a senior fellow at the Peterson Institute for Economic Research. "Stimulus is not going to be enough by itself. We need an aggressive housing program to limit foreclosures, a more expansionary monetary policy, and a bank recapitalization."

Mr. Johnson says the Obama administration must find a way to recapitalize banks because they have few other ways to access new cash with the current weakness of the stock and bond markets. If, as he suspects, credit remains locked down and defaults rise in the coming year, then the banks will need another source of funding to keep credit flowing. "You get into this situation when losses wipe out their capital and you need to nationalize your banks."

But it's expensive. The Congressional Budget Office forecast a deficit of $1.2 trillion for this year on Wednesday. And few are expecting a quick turnaround, one reason that Obama warned earlier this week that "potentially we've got trillion-dollar deficits for years to come." That comment in perspective? The federal deficit in the last fiscal year, which ended on Sept. 30, was $450 billion.

All of this means more job losses for now. In the last two months of 2008, the US lost 1 million jobs, according to an estimate by payroll company ADP and the US unemployment rate was at 6.7 percent in November. On Tuesday, the Congressional Budget Office warned that the unemployment rate could rise above 9 percent by the end of the year – its highest level since 1983.

Will nations work together?

Although the US stimulus package, if passed, would be the largest – about 5 percent of output as measured by gross domestic product (GDP) – it's not the only one.

The European Union – with a combined economy that is slightly larger than that of the US – has recommended that its members enact a stimulus plan amounting to 1.5 percent of their combined GDP, or about $220 billion.

Australia's Prime Minister Kevin Rudd warned in piece published in Wednesday's Financial Times that much of the fiscal stimulus so far announced by world governments will not be released until 2010.

He called for international coordination of spending plans to create a cycle where "stimulus measures from one country spill over into their trading partners" and said he's worried about the emergence of "beggar-thy-neighbor policies" like the re-creation of trade barriers. Resetting the table for economic growth "will require unprecedented cooperation among governments. If we fail, the consequences will be grave," he wrote. 

"The United States isn't the only country right now that's talking about massive fiscal stimulus programs, almost everyone is," says Curtis Dubay, a senior policy analyst who focuses on tax issues for the Heritage Foundation. "But of course the US is going to lead the world out of recession."

Mr. Dubay hesitates to put a precise figure on what the right amount of stimulus is, but he argues that if current proposed and scheduled stimulus proposals fail, more government spending will probably fail as well.

Conservative groups like his believe deep, across-the-board tax cuts are what's needed, though that's something they acknowledge is unlikely with an incoming administration that is signaling it favors tax cuts targeted at the middle class, not permanent tax cuts for all corporations or individuals.

"How much is ever enough? No one knows," he says. "But we're getting up to almost 10 percent of deficit spending already. Massive federal government spending problems are not likely to work."

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