No one likes a budget deficit, but run a deficit - - and a large one - - the U.S. must, and for two years, due to the depth and seriousness of the U.S. recession, so says an economist."We will likely have to run $1 trillion deficits for each of the next two years in order to provide adequate fiscal stimulus for the U.S. economy," economist David H. Wang told BloggingStocks Wednesday.
A large problem requires a large stimulus
What's driving the need for a large fiscal stimulus? The worst consumer and business demand conditions in more than 25 years, Wang said. "Every major demand factor in the economy...consumer, business, and capital investment, is retreating. The demand has to occur somewhere, and if the U.S. government does not create it, the recession with lengthen and deepen."
The U.S. recession, which began in December 2007, is already in its 14th month and there's no end in sight, based on leading economic indicators or economic fundamentals. One tell-tale stat: the job market. Or should one say, the 'non-job market.' ADP (NYSE: ADP) announced Wednesday that private employers cut another 693,000 jobs in December 2008. Meanwhile, many economists expect Friday's U.S. Labor Department job report to show a 500,000-job loss in December 2008. If it does, then the U.S. economy will have lost at least 2.5 million jobs in 2008.
Wang said continued monthly job losses above 200,000 would indicate to him "that the economy is entering a vicious cycle of corporate revenue declines, job lay-offs, decreased demand, leading to further corporate revenue declines - - that must be avoided."
"We are in danger of entering a situation in which the economy is worsening not for any objective reasons but because of the negative spiral. Actions need to be taken to reverse that destructive spiral, and soon," Wang said.
And that involves creating demand via infrastructure projects [highways, roads, schools, parks, energy delivery systems], civil service building construction, public works projects, and by providing assistance to deficit-laden states, and via large investment tax credits and other incentives for businesses large and small, among other tactics, Wang said.
The Obama Administration is expected to propose a package comprised of the above for about $700-850 billion. Meanwhile, the Congressional Budget Office says current TARP and related spending will push the U.S. deficit this year, fiscal 2009, above $1.2 trillion. The CBO said any Obama Administration economic stimulus spending would add to that $1.2 trillion total for this year. The CBO also expects the U.S. economy to contract 2.2% in 2009, with the unemployment rising to 9% in early 2010.
Further, Wang said additional money allocated next year, in fiscal 2010, may keep the U.S. budget deficit above $1 trillion in 2010.
Still, Wang said the specter of back-to-back $1 trillion U.S. budget deficits in 2009 and 2010 should not cause investors to turn against the fiscal stimulus tool.
"We must reverse the negative spiral and start a positive spiral of increasing demand, increasing corporate revenues and job growth and we will need both fiscal stimulus and the Fed's quantitative easing to do this," Wang said. "Those are the conditions investors want to see."
Fiscal Policy/Economic Analysis: Economist Wang, like Harvard grad President-elect Barack Obama, does not mince words, but it doesn't take a Harvard graduate to discern what the U.S. economy needs: stimulus aimed at jump-starting demand. Moreover, the need is urgent: economic fundamentals continue to deteriorate, hence U.S. policy makers must take every action to end the negative spiral and pull the economy out of its pronounced, damaging, and dangerous recession.
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Reader Comments (Page 1 of 1)
1-07-2009 @ 4:36PM
BHarrison said...
In amongst all of thess economic debacles, and blatant pyramid and Ponzi schemes and other frauds, one can only wonder about the continuing "secrecy" that is being maintained in spite of Congress' original pledge to provide and to require that recepients of the Bailout monies, to provide FULL DISCLOSURES and TRANSPARENCIES in regard to the expenditures of those monies . . . and disclosure of corporate financial reports, etc.
In spite of it all, there has been an air of "secrecy" in most of these matters. One can only question "what is occurring, and why?" All of the BAILOUT efforts todate have been to bailout the major FIs, not the American people or small businesses, which are the backbone of our economy.
The American people must demand that Congress, the Fed, the SEC and the other regulatory and oversight departements and agencies provide FULL DISCLOSURE and TRANSPARENCY of the use of the Bailout monies, and that ALL corporations on the stockmarkets provide "fully certified audit, by reputible auditing corporations to reveal the true financial reports for all of these corporations. INTEGRITY must be instill in our corporations and in our markets.