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  • Mark Hubey
    ... Subject: [Geopol News] Squeezing the Most From a Stimulus Plan Date: Mon, 01 Dec 2008 11:23:28 -0800 From: Global Geopolitics Net
    Message 1 of 1 , Dec 2, 2008
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      -------- Original Message --------
      Subject: [Geopol News] Squeezing the Most From a Stimulus Plan
      Date: Mon, 01 Dec 2008 11:23:28 -0800
      From: Global Geopolitics Net <ercnow@...>
      Reply-To: global-geopolitical-news@...
      To: Geopol NEWS <global-geopolitical-news@...>

      Squeezing the Most From a Stimulus Plan

      The New York Times
      December 1, 2008

      Copyright 2008 The New York Times Company


      Now that the government has spent nearly $1.4 trillion to stabilize the
      financial system, economists and policy makers — and the president-elect
      — are trying to figure out how much must be invested in a stimulus
      package to stop the recession, and what that money should be spent on.

      The size of a possible stimulus plan rises as the economy contracts, and
      that is happening at a 4 percent annual rate, according to current
      estimates, or eight times as fast as it was this summer. Just offsetting
      that contraction requires a federal infusion of at least $400 billion,
      many economists calculate. And even that would not restore a healthy

      "The hope is that the next stimulus package will be large enough to move
      the economy from big negatives to zero growth," said Mark Zandi, chief
      economist at Moody's Economy.com. "That is the benchmark today: zero

      President-elect Barack Obama has not stated what the stimulus plan might
      cost, though Congressional leaders have cited figures of $500 billion
      and higher. Mr. Obama has given a hint, though. He speaks of a recovery
      that would generate 2.5 million jobs in the first two years of his
      administration. That would require not just zero economic growth, but a
      fairly robust expansion — a swing in effect from the present 4 percent
      contraction to a growth rate of 2.5 to 3 percent a year.

      Achieving such a swing would mean adding nearly $1 trillion in annual
      output to the economy. The private sector normally does this, stepping
      up its spending as a recovery takes hold. But if that does not happen
      this time, the Obama administration would have to step in, via a
      stimulus package that generated the additional $1 trillion in output,
      most likely through a mix of federal spending and tax breaks.

      No policy maker or economist has publicly suggested such a huge sum.
      Trillions of dollars is a commonplace reference in talking about the
      financial bailout, but not yet the stimulus. The debate instead revolves
      around the proper mix for a stimulus package — that is, the most
      effective combination of outright spending and lower taxes.

      Prominent economists argue that more than 50 percent of the next
      package, whatever its size, should be devoted to spending — on public
      infrastructure like highway and school repair, and on items like food
      stamps and stepped-up aid to state governments, subsidizing their spending.

      Mr. Zandi, who advised the Republican presidential candidate, John
      McCain, said in testimony last month before the Senate Budget Committee
      that nearly every dollar spent in this fashion generates $1.50 or more
      in economic activity. Repairing a road, for example, means hiring
      workers who spend their new salaries at supermarkets, which in turn hire
      more store clerks and stock more groceries to handle the extra spending.

      This "multiplier effect" is missing, however, when the stimulus comes as
      a tax break. A $750 billion stimulus package devoted entirely to
      spending could achieve, through the multiplier effect, more than the $1
      trillion rise in output that the Obama administration apparently seeks
      to generate the 2.5 million new jobs.

      A stimulus devoted entirely to tax breaks, in contrast, would require
      the entire $1 trillion in rebates or lower taxes, and probably more, to
      create those jobs, in part because taxpayers getting this windfall might
      not spend all of it.

      "The multiplier effect is clearly less than $1," said Nigel Gault, chief
      domestic economist for Global Insight, "and perhaps as low as 30 cents
      if only some of the tax break is spent."

      The one stimulus enacted by Congress — a $168 billion package that the
      president signed early this year — consisted entirely of tax breaks,
      mainly in the form of rebate checks mailed to millions of Americans.

      Some of that windfall was saved or was spent on imports rather than on
      goods and services produced in this country. Spending on domestically
      produced goods and services adds to the nation's economic output, but
      imports do not, helping to explain why this first stimulus failed to
      arrest the contraction.

      The problem with a stimulus package weighted heavily toward public
      spending is that there is a shortage of projects on which spending could
      begin in two or three months. The labor-oriented Economic Policy
      Institute, for example, has listed $360 billion in ready-to-go work, a
      third of it highway and school repair. Mr. Zandi offers a similar estimate.

      "Still," he said, "if you don't pick a big enough number for a stimulus
      package now and you have to announce another number next year, people
      will say: 'Oh, the stimulus didn't work. What makes you think this one
      will?' "

      Until now, big numbers have been noticeably absent from the stimulus
      debate. The House approved a $60 billion package in late September,
      sending it to the Senate, which has not voted on the measure. The House
      action was followed in mid-October by talk among Democratic
      Congressional leaders of upgrading the $60 billion to as much as $200
      billion in a lame duck session.

      And then a week ago, Senator Charles E. Schumer, the senior Democrat
      from New York, suggested that any package should be $500 billion to $700
      billion — numbers that begin to approach the $1.4 trillion already spent
      to resurrect the financial system.

      "By our estimates," Jan Hatzius, chief domestic economist for Goldman
      Sachs, said in a newsletter last week, "the private sector retrenchment
      could subtract an annualized 4 percentage points or about $600 billion
      from economic growth through the end of 2009."

      The financial sector bailout does not address this decline. Rescuing
      banks and other lenders has little direct impact on economic growth or
      job creation. The chief goal of the bailout is to get credit flowing
      again from reluctant and damaged lenders.

      The stimulus package, in contrast, puts up government money as a
      substitute for the spending and investment that is no longer taking
      place in the private sector — despite low interest rates — so that the
      economy can grow again, or at least stop shrinking.

      That makes the stimulus package ever more important if the economy
      continues to deteriorate at its present pace. Not since the first
      quarter of 1982, in the midst of a severe recession, has the gross
      domestic product contracted at a 4 percent annual rate in a single
      three-month period, as a growing number of forecasters say it is now
      doing, according to Blue Chip Economic Indicators.

      In America's $14.4 trillion economy, that means the output of goods and
      services has been declining by nearly $50 billion a month since
      September — a decline the government will find itself under ever more
      pressure to reverse if demand in the private sector does not revive.

      Global Geopolitical News

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      H.M. Hubey
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