Obama economist: US should consider second stimulus package

The U.S. recession has created a big hole, and it's going to take a great deal of capital from a variety of sources to fill it, most economists agree.

The GDP hole is so big it may require a second fiscal stimulus package, says Laura Tyson, a member of President Obama's Economic Advisory Panel, the Agence France-Presse reported Tuesday.

Speaking in Singapore, Tyson said the current, $787 billion fiscal stimulus package "will have a positive effect, but the real economy is a sicker patient," Bloomberg News reported Tuesday. Tyson added the current stimulus package was "a bit too small."
Tyson's take on the need for a second stimulus package differs slightly from recent administration comments by U.S. Vice President Joe Biden, who said Sunday it's too soon to consider a second stimulus package because not enough time has passed to gauge whether the first stimulus package was large enough to produce the targeted GDP increase.

However, Tyson's analysis is in-line with Nobel Prize-winning economist and New York Times columnist Paul Krugman, who argues the 6.5 million jobs lost and statistics on real wage declines during the pronounced recession are sure signs that the U.S. economy will need more fiscal stimulus. Failure to do so will put the United States on a track for Japanese-style deflation, which is very hard to reverse, Krugman says.

Was the stimulus package too small?

Critics of the fiscal stimulus package say it wasn't structured properly and that not enough money was front-loaded to provide the large, immediate jolt of stimulus many economists argue is essential to create a maximal increase in GDP, commonly known in economics circles as 'the biggest bang for the buck.'

Other Obama administration opponents, including House Minority Leader John Boehner (R-Ohio), have criticized the stimulus package tactic because they are philosophically opposed to using public spending to help stimulate the economy; they argue a better tactic would be to cut federal taxes.

Tyson also said the United States can afford to pay for a second stimulus package, despite its large budget deficit, expected to approach $1.8 trillion this year, and total about $1 trillion next year, fiscal year 2010, the AFP reported.

Fiscal Policy Analysis: Interpret economist Tyson's remarks as floating a trial balloon for a second stimulus package: at this juncture, it's an open question as to whether Congressional Democrats would favor a second package. Expect all House Republicans and most Senate Republicans to oppose it, ignoring all facts and logic. A second stimulus package would not occur before September, after Congress returns from its summer break.

Further, the critique of the first stimulus package is partially valid: only about $60 billion of the 'stim 1' has been spent so far, but that criticism must be qualified by the fact that the infrastructure component was designed to allocate funds incrementally, each month, to continue to add dollars to the economy over about a year and half. Moreover, some spending items are and will continue to have an immediate impact; others will take three to six months to have an affect on GDP and on related economic statistics.

That said, one error of 'stim 1' was its small size, as economist Krugman has astutely noted. Massive declines in the stock market, housing sector, and bond market have taken tens of trillions of dollars out of the U.S. commercial system and near-double digit unemployment has seriously reduced consumer demand. It was unrealistic to expect a $787 billion stimulus package to fill those large holes. Stim 1 should have approached $1.2 billion – with at least $400-500 billion in front-loaded spending to jump-start GDP growth. Hence, policy makers should think in terms of a supplemental stimulus package of at least $300-400 billion, including increased hiring for government jobs at the IRS, State Department, Defense Department, National Institutes of Health, SEC, and National Parks Service, among other departments and agencies, if necessary.
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