Upping the ante on US federal stimulus package

Bloomberg

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The one thing that isn’t shrinking in the U.S. economy these days is the size of the stimulus package that financial experts say is needed to turn it around.

With automobile sales dropping, payrolls plunging and manufacturing contracting, economists from across the political spectrum are raising the ante on how much the government should lay out. Some are now calling for at least a $1 trillion boost.

Kenneth Rogoff, a Harvard University professor who was an adviser to Republican presidential candidate John McCain, and Joseph Stiglitz, a Nobel Prize winner who served in President Bill Clinton’s White House, are among those who say President-elect Barack Obama should push for a package of that size.

"They need a stimulus of $500-to-$600 billion a year for at least two years to counter what is going to be a collapse in consumption," said Rogoff, a former chief economist at the International Monetary Fund.

Unemployment data
This week brought news that the economy has been in recession for a year. The Labor Department said yesterday that a larger-than-anticipated 4.09 million fired workers received government unemployment checks in the week ended Nov. 22.

"Every day it looks like the stimulus package needs to be bigger," said Bill Samuel, the lead lobbyist for the AFL-CIO, the largest U.S. labor federation. "You’re talking $500, $600, $700 billion or even more" for a year.

Obama, who has said that enacting a stimulus plan will be his top priority once he takes office on Jan. 20, has himself been steadily increasing the amount he thinks is needed.

Earlier in the presidential campaign, he proposed a package worth $50 billion, then raised that to $175 billion as the election approached. Advisers have since said the program may total as much as $700 billion, although that number, too, may rise.

"Congress should think in terms of $900 billion in 2009, with possibly more in 2010," said James Galbraith, a self-styled liberal economics professor at the University of Texas.

"I may be higher than they are at this point," he said, "but things are evolving." Whatever its size, the package is likely to include tax cuts, aid to the states, higher unemployment benefits and increased spending on infrastructure such as roads and bridges.

New Jersey Governor Jon Corzine said Washington needs to step in because the U.S. is caught in a "liquidity trap," where repeated interest-rate cuts by the Federal Reserve fail to boost the economy because banks don’t want to lend and skittish consumers and companies don’t want to borrow.

"If the government doesn’t operate to fill that gap, we are going to see not only rising unemployment but a shockingly high level of unemployment over the next 12 to 24 months," Corzine said Wednesday. He called for a stimulus of "overwhelming force."

Lessons from Japan
Adam Posen, a former New York Fed official, agreed that’s the lesson to take from Japan’s experience during the 1990s, when it faced a similar situation.

"The stimulus has to come through the fiscal side," said Posen. "A package of 4 percent of GDP, even 5 percent of GDP is not unreasonable over one year." That would equate to about $500 billion to $700 billion.

Posen said Japan’s economic-recovery packages at times didn’t seem to work because they turned out to be smaller than first announced and were slow in coming.

The Obama team is aware of that problem. "We hear that Japan invested over a trillion dollars in infrastructure and nothing happened," Vice President-elect Joe Biden told a meeting of state governors on Dec. 2. "Well, it’s all about how rapidly we can get these projects up and running."

While some conservative economists agree that a big stimulus package is needed, they argue that it should focus on tax cuts, not on increased government spending on infrastructure.

John Makin, a visiting scholar at the American Enterprise Institute in, has advocated a temporary cut in payroll taxes that help finance Social Security. So, too, has Stanford University Professor Robert Hall, the chairman of the National Bureau of Economic Research committee that calls the beginnings and ends of recessions.

"Politicians love pork, but maybe they can be pushed toward something better," Hall said.

Because the payroll tax is paid by employees and businesses, reducing it would both give consumers more money to spend and businesses more incentive to retain staff, said Mark Bils of the University of Rochester.Not all economists think fiscal stimulus is the answer to the economy’s ills. "There are other choices," said Greg Mankiw, a Harvard professor who served as President George W. Bush’s chief economic adviser. Foremost among the alternatives is monetary policy, said Mankiw. The Fed can act to bring down long- term interest rates as well as short-term ones, he said.