Massive Fiscal Stimulus Urgently Needed to Salvage Economy
On Dec. 1, the Business Cycle Dating Committee of the National Bureau of Economic Research identified Dec. 2007 as the end of the previous economic expansion and the beginning of the current economic recession. This means that the previous expansion was a little more than six years long and that we’ve been in the current recession for about a year. Moreover, the  recession is definitely deepening as 2008 draws to a close.

Rapidly rising claims for unemployment compensation point toward further losses of payroll employment in both November and December and the unemployment rate is bound to rise further. Also on Dec.1, Federal Reserve Chairman, Ben Bernanke, delivered a wide-ranging speech, explaining what the Fed has done so far on interest rate policy, liquidity policy and policies designed to stabilize the financial system.

On Dec. 16, the Fed cut its target for the federal funds rate to the lowest level on record — a range of zero to 0.25%.  At the same time, the Fed pledged to use "all available tools" to counteract the effects of the current recession. However, when looking forward in his Dec. 1 speech, Bernanke had conceded that, with the target federal funds rate already quite low, the scope for using conventional interest rate policies to support the economy was somewhat limited in the near term. Hence, fiscal policy will heavily determine the performance of the economy in 2009. 

Massive fiscal stimulus is urgently needed to limit the deepening economic recession in the U.S. and to get the economy back on a positive growth track at some point during 2009. As dismal economic data have piled up, the estimated size of a fiscal stimulus package sufficient to stabilize the situation has been growing. 

It’s now become commonplace to talk about a package in the $500 to $700 billion range, around 4% of GDP. This, in addition to the previously enacted $700 billion Troubled Asset Relief Program (TARP) that’s supposed to stabilize and strengthen the financial system through capital injections to financial institutions and other means. The market “consensus,” (including NAHB), is looking for an aggressive combination of tax cuts and spending increases early next year when the economy will be very vulnerable to a downward spiral in the absence of powerful fiscal stimulus. [ return to top ]