Fiscal stimulus package is big, but may not be big enough

As the U.S. Senate prepares to vote on an $820-$900 billion fiscal stimulus bill and send it to a congressional conference committee, a stark reality confronts lawmakers: the stimulus package may not be large enough.

A group led by a handful of moderate Republicans and selected Democrats cut roughly $60-80 billion from the Senate bill, focusing on what they said were items not directly related to stimulating the economy.

Economist Richard Felson said lawmakers may find themselves in six months staring at an economy that needs another stimulus jolt, and given the two options, it's better to provide the stimulus all at once, from a GDP-impact standpoint.

"From the standpoint of moving the GDP needle, it's much better to allocate $1.2 trillion or $1.3 trillion all at once as opposed to $800 billion now and $400 billion later," Felson said. "In terms of taking up the slack, or the lost GDP output due to the recession, we will need at least $400 billion more in stimulus, and from a commercial activity multiplier standpoint, the more money added to the economy within six months, the better."

Items cut from the stimulus by the Senate include a 50% reduction, to $3.5 billion, of funding to make federal buildings more energy efficient, the elimination of $16 billion for school construction, and $3.5 billion for higher education building construction.

Large GDP decline seen

Felson said he expects U.S. GDP to decline by 3-3.5% in 2009 to about $14.0-14.1 trillion. U.S. unemployment, currently 7.6%, will likely rise to 8.5% by the end of 2009, and 9% by the recovery's start, he said. Meanwhile, the augmented unemployment rate, which includes part-time workers unable to find full-time work, will likely rise from the current 13.9% to 15% by year's end.

"Critics in nine months may charge that the fiscal stimulus isn't working, when what's more likely is that in areas that received sufficient stimulus, GDP will have risen. It's just that there may not be enough to go around, given the U.S. economy's size," Felson said. "For that reason, it would not surprise me to see another stimulus package within nine months."

Fiscal Policy Analysis: A larger stimulus package has to be weighed against the political reality. Congressional Republicans probably would have seized upon a $1 trillion fiscal stimulus, and it was for that public relations reason Obama administration and Congressional Democrats kept the total below that level, even though from a macroeconomic standpoint a much larger stimulus package is warranted.
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