U.S. Can't Afford Not to Have a Second Stimulus Package

Mark Zandi, chief economist at Moody's Economy.com, and Rudolph Penner, a fellow at the Urban Institute and former Congressional Budget Office director, both said Friday that an additional stimulus package would be required to improve the U.S. economy and allow the nation to avoid a double-dip recession.The two spoke during a conference at the Urban Institute titled "Does the Economy Need – and Can We Afford – Another Jolt of Stimulus?"

Mark Zandi said we need to "get the GDP growing before worrying about debt." He added that with unemployment at 10% and the economy still shedding jobs, it's more critical to focus on GDP growth now than to worry about the deficit. Zandi's prescription: About another $200 billion in stimulus, focused on tax breaks to encourage hiring, expanded lending for small business, an expansion of aid to those who have lost their jobs, financial support for state and local governments, and a fix for the housing crisis. While he said he didn't know the details of the president's promise of $30 billion for community banks to make loans available to small business, Zandi said he supported more stimulus for small-business lending.

In a paper submitted for the conference, he wrote, "The job market is arguably as bad as it has been since the Great Depression, with nearly every industry, occupation, and region of the country suffering form weak labor demand. Layoffs have abated since the financial panic of a year ago, but the number of forced separations remains uncomfortably high. Even worse, hiring and job creation remain dormant." During the conference Zandi said, "the job market is improving but hiring is not engaged." He believes the lack of credit for small business is a major contributor to this lack of hiring.

Zandi said the nation needs to generate at least 10 million jobs and that it will take at least four to five years to do so. But in order for there to be an improvement in the GDP, the job market must improve. Also, there must be a fix for the foreclosure crisis. House prices won't stabilize until that fix is in place, and Zandi expects foreclosures to continue to rise in 2010. He believes lenders won't start lending again in a meaningful way to consumers until they see housing prices stabilize.

Finally, Zandi believes the expansion of consumer and small-business credit will be crucial to signal businesses that it's safe to hire again. For example, at the peak of the credit card market in 2008, 450 million credit cards accounts were outstanding; by December 2009, that number had dropped to 325 million. Right now, businesses and consumers are "deleveraging," and until that process reverses, we won't see hiring or major growth in the GDP.

Moving Toward a Dangerous Debt Threshold

Penner had a more somber view of what needs to be done. He supported a stimulus package of about $95 billion, less than half the level Zandi recommends. Penner's stimulus would be more directed to easing the pain for those suffering. For example he supports helping the states by making $40 billion more available for Medicaid and $10 billion for food stamps. The rest of the stimulus should be for encouraging jobs. To help fund this stimulus, Penner believes the government should reallocate any uncommitted infrastructure funds.

Both Zandi and Penner opposed any new infrastructure spending. Penner called it a "cumbersome stimulus tool" that takes too long to work. He believes infrastructure spending is a windfall for existing businesses but does not stimulate aggregate demand. Zandi believes it's much more effective to focus on some type of temporary job tax credits and other tax cuts because the provide more bang for the buck. He thinks infrastructure should be at the bottom of any stimulus list.

Zandi and Penner both agreed that it was time to look at deficit reduction as soon as we are sure there won't be a double dip recession. Penner focused on an economic theory that says if a country allows its debt to exceed 90% of GDP, that nation will start to see a growth rate decline of 1% per year. The U.S. is moving dangerously close to that threshold, and Penner thinks we'll reach it even without additional stimulus spending by 2013.

Zandi agrees that's a dangerous threshold, but notes that debt control is not the only way to avoid reaching it: Growing the GDP would also help. Zandi believes we need to start reducing the debt with a combination of spending cuts and tax increases once the economy is out of the woods, but says it's too soon to start working on it right now.
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