Tuesday, July 14, 2009

Stimulus 3 may be on its way

I have been out of town the last 10 days visiting family in Kentucky and Michigan. While I was away, the June employment report contained discouraging news; nonfarm employment declined by 467,000 and the unemployment rate reached 9.5 percent. Unemployment is now well above the level forecasted by President Obama's economic team when the stimulus package was approved last February.

Many politicians (but fewer economists) are wondering if a third stimulus package is needed (remember there was a tax cut last year). My Harvard classmate and former director of the Council of Economic Advisers Ed Lazear makes the case against further stimulus. Lazear reminds us that most of the stimulus money does not come online until next year and that the size of the 2009 piece of the stimulus package is actually smaller than the tax cut enacted under the Bush administration in 2008.

Paul Krugman has argued all along that the Obama stimulus package was too small; he makes the case of what to do next in a recent New York Times column. For the moment most economists (myself included) think it is way too early to be thinking about another stimulus package.


  1. I think it is best to hold off on another stimulus package. There are two basic elements to this reasoning:

    1) We are not sure the full effect of the first stimulus package, so why spend more money on something when we are not sure if the money we have already spent is all we need?
    2) The american people are not likely going to stomach another debate while the deficit continues to grow and health care is causing so much angst.

  2. Doesn't this lend credence to the fallacy of stimulus packages? The whole "prime-the-pump" metaphor is silly. If this were true, let's go for broke - we should just socialize everything and redistribute the wealth. We all know that is silly and doesn't work (Eastern Europe), but somehow we convince ourselves that our form of government spending is good - even when it reaches $1 trillion.

    And, with the economy recovering, but only a small portion of the stimulus package spent, there is a strong case to be made it was never needed in the first place.

    Wouldn't it be better to stop the government from running deficits which require it compete in the capital markets for resources (selling bonds) and allow individuals to make proper investments which can grow the economy long-term?

    I can calculate GDP without the "G". Government stimulus via deficits is a zero-sum game.