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Stiglitz: Economist consensus: no time for half-measures

a little night musing's picture

Joe Stiglitz in the NY Times:

A $1 Trillion Answer
Published: November 29, 2008

WHAT President-elect Barack Obama will need to do is horribly complicated but also very clear.

First, he must stop the economy from going deeper into recession. Then he needs to bring about a robust recovery, preferably in ways that support the long-term needs of the United States: by repairing our neglected public works, invigorating our technological leadership, making our society greener, fixing our health care problems, healing our social and economic divide, and restoring our social compact.

It will not be easy. President Bush’s legacy of debt and the opposition of those who benefit from the status quo present major obstacles.

There is an emerging consensus among economists that a big — very big — stimulus is needed, at least $600 billion to $1 trillion over two years. Mr. Obama’s announced goal of 2.5 million new jobs by 2011 is too modest. In the next two years, almost four million workers will enter the labor force — or would if there were jobs. Combined with the loss of employment this year, that means we should be striving to create more than five million jobs.

A large stimulus package can always be trimmed later if it’s not needed because the economy returns to health faster than most economists think. But we need to plan for what looks to be a deep and long downturn. By relying heavily on automatic stabilizers — expenditures like increased unemployment benefits and revenue sharing with states — we can dose out the medicine as needed. The deeper and longer the downturn, the greater the spending.

Faint measures would be foolhardy. A weaker economy will suffer lower tax revenues, more foreclosures and more bankruptcies. Once a firm is bankrupt, you can’t unbankrupt it by providing a stronger stimulus later on.

There are other elementary principles that help guide the design of a good stimulus. The government could, for instance, temporarily pay (through a tax credit) part of the cost of new private investment for companies that are spending more than, say, 80 percent of what they have spent annually in recent years on equipment like computers and machinery. This would be a high-powered, low-cost stimulus.

Latter-day Hooverites will say the soaring deficit and national debt mean we cannot afford a large stimulus package. Although today they are receiving billions of dollars in aid, once they have their money some from the financial sector will argue that the economy won’t recover unless confidence is restored, and that confidence won’t be restored until the deficit narrows.

But it’s impossible to restore confidence when the economy is in shambles. When millions of Americans are out of work and hundreds of thousands of businesses are going into bankruptcy, there will be no “confidence.” This is the reality. To avoid this, we need a big stimulus.

He discusses the need to provide restrictions on the way in which money is used in the Paulson bailout, which he says need not be thought of as a "done deal". And this:

Americans are rightly afraid of losing their jobs, and with that, their health insurance and their homes. We need to provide health insurance to the unemployed and to the uninsured, and we need to do it quickly, possibly through an expanded and more efficient Medicare. [Why not Medicare for all?]

We also need to stem the flood of foreclosures. If we help poorer homeowners, banks will benefit, too, as foreclosures are reduced.

This echoes what I have been reading from Nouriel Roubini:

President-elect Barack Obama's administration's reaction to the current economy would have to be, in [Roubini's] words, "swift and bold."

What are the first things they need to tackle? First one is the fiscal stimulus, because the troubled economy is in a freefall, so we really need to boost aggregate demand, and the sooner and larger the better. The second thing they should do is recapitalize the financial system. Most of the $700 billion is going to be used to recapitalize banks, broker dealers, finance companies and insurance companies. To do it aggressively and fast is going to be important.

The plan Obama has talked about includes spending on infrastructure and energy development to create jobs. How likely is that to produce long-term aid to the economy? We need to do it because demand and spending and housing are literally collapsing. That will get a boost from public-sector spending: [spending on] infrastructure, unemployment benefits, state and local government aid, more food stamps. We're going to have to think larger, but I don't think you can pass most of it until January when [Obama] comes to power. We're going to have to wait, because nothing seems possible for the time being. But I expect most of his plans towill pass once the new administration is in power.

Obama is largely powerless for the next two months. What's your outlook from now through January? The lame-duck session of Congress really needs to spend on unemployment benefits, aid to save the local governments and on food stamps. Those things are very short-run and are very important. It's really the most we can do for now

And Paul Krugman:

Even if the rescue of the financial system starts to bring credit markets back to life, we'll still face a global slump that's gathering momentum. What should be done about that? The answer, almost surely, is good old Keynesian fiscal stimulus.

Now, the United States tried a fiscal stimulus in early 2008; both the Bush administration and congressional Democrats touted it as a plan to "jump-start" the economy. The actual results were, however, disappointing, for two reasons. First, the stimulus was too small, accounting for only about 1 percent of GDP. The next one should be much bigger, say, as much as 4 percent of GDP. Second, most of the money in the first package took the form of tax rebates, many of which were saved rather than spent. The next plan should focus on sustaining and expanding government spending—sustaining it by providing aid to state and local governments, expanding it with spending on roads, bridges, and other forms of infrastructure.

The point in all of this is to approach the current crisis in the spirit that we'll do whatever it takes to turn things around; if what has been done so far isn't enough, do more and do something different, until credit starts to flow and the real economy starts to recover.

See also. :)

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