With the news that our economy is now contracting -- for the first time since 1991 -- at .03 percent annually, few could deny that a recession has begun. The hit mainly comes from contracting consumer spending in response to job losses and other economic problems. The candidates used the news to snipe at each other, but neither said anything interesting substantively. I'll include their statements after the jump anyways, because, hey, there's no word limit on the internet, right?
I don't have too much commentary on the announcement itself; we knew the economy was shrinking, now we know by (roughly) how much. The question, as always, is what is to be done? The answer is stimulus. And it's not just me and my liberal pals who think so! No, my friends, it's Martin Feldstein as well. The conservative economist and McCain adviser has stepped into the breach and dealt what is hopefully a death blow to neo-hooverism by writing the following:
Another round of one-time tax rebates won't do the job. The rebates that Congress enacted this spring failed to stimulate consumer spending: More than 80 percent of tax rebate dollars were saved or used to pay down existing debt.
The only way to prevent a deepening recession will be a temporary program of increased government spending. Previous attempts to use government spending to stimulate an economic recovery, particularly spending on infrastructure, have not been successful because of long legislative lags that delayed the spending until a recovery was well underway. But while past recessions lasted an average of only about 12 months, this downturn is likely to last much longer, providing the scope for successful countercyclical spending.
A fiscal package of $100 billion is not likely to be large enough to revive the economy. The fall in household wealth resulting from the collapse of the stock market and the decline of home prices may cut aggregate spending by $300 billion a year or more.
The president-elect should focus on developing a mechanism for identifying and funding spending initiatives that can occur quickly and that would otherwise not be done. While it would be good if some of the increased spending also contributed to long-term productivity, the key is to stimulate demand. Any plan to finance this spending by raising taxes, even if postponed, as Sen. Barack Obama has suggested, would hurt the recovery by causing affected taxpayers to cut their spending now.
The increased government spending should include not only money for infrastructure such as bridges and roads but also for a wide range of equipment. Rebuilding some of the military capacity that has been depleted by the wars in Iraq and Afghanistan could be done relatively quickly and should be part of the overall package.
-- Tim Fernholz
