Will the U.S. economy need a second fiscal stimulus package?

Fiscal stimulus - The Sequel?

Unfortunately, the economic conservatives - - which include most Congressional Republicans - - are playing the role of Captain Quint, with the belief that existing resources are sufficient to address the problem.

Critics might argue that on the heels of a $787 billion fiscal stimulus package, and an upcoming fiscal 2010 proposed budget from the Obama administration that's likely to include up to $100-200 billion more in rescue money for the banking system and other initiatives, that: 1) the resources aren't there for more stimulus and 2) another stimulus package isn't needed.

On the first point, Keynesian would argue that, fiscally, the resources are there: President Obama's proposed budget will cut ineffective, unneeded, and wasteful programs (and redirect national priorities) with a leaner, more-effective budget that cuts the federal budget deficit in half, to about $500 billion, by fiscal 2013.

On the second point, as New York Times columnist and Nobel Prize-winning economist Paul Krugman has noted, the U.S. economy is likely to see a $2.3-3.7 trillion drop in demand over the next three years. That's an enormous reduction in output - - a very big hole to fill, to use a landscaping term - - so there's only one word one can really attach to a second stimulus bill: necessary. Krugman originally argued that the U.S. needed at least a $1 trillion fiscal stimulus package to adequately jump-start demand.

Further, investors should also look at a second fiscal stimulus package in this light: the fiscal stimulus, combined with the Fed's quantitative easing, related bank bail-out / intervention efforts, low interest rates, and the pull-back in gasoline / oil prices, should add a large amount of stimulus to the U.S. economy - - stimulus capable of starting a sustainable economic recovery.

Still, one would be remiss if one did not recognize that alternative stimulus options exist, with economic conservatives frequently citing (and preferring): tax cuts, lower federal spending, and less government regulation. The Obama administration plan has and will continue to implement tax cuts designed to encourage investment; the decreased federal spending argument is applicable to needless / ineffective government programs, but the economic conservatives' non-stimulus assertion is flat out wrong: sufficient increases in government spending will increase GDP growth, as it did during FDR's New Deal and during World War II (1941-1945).

Economic Analysis: There's always the danger that the combined stimulus efforts - - fiscal and monetary - - could cause the U.S. economy to accelerate to a growth rate that's too fast, leading to inflation. Still, given widespread weak fundamentals, the bias remains with more stimulus. Or, to paraphrase FDR, the costs of not doing something are far far greater than the costs of doing something.