One aspect of the economic cycle investors need to keep at the forefront is the nature of economic change and economic recovery, as promulgated by economist John Maynard Keynes. First, toss out any notions that market forces, left to their own devices, will always bring about a quick economic recovery.
As Keynes both theorized and proved empirically, recessions are not necessarily self-correcting. An economy, including the current U.S. economy, could suffer a large loss of demand, and then operate with very low economic activity for years, absent adequate stimulus.
As an analogy, it's sort of like having a field tractor stuck in the mud. The tractor could sit their spinning its wheels, stuck in the mud, for a very long time, while the ground dries slowly. Likewise with the economy: a reduced level of commerce could occur for a long time, but if there's not enough stimulus, it just stays at the same level of output. Or as Keynes put it, it bounces along the bottom for a very long time. Absent sufficient stimulus, there is no 'guarantee' of a recovery.
Output gap: a big hole to fill
Hence, the key question is: did the $787 billion 2009 fiscal stimulus package represent stimulus that was big enough? We're early in the game, but the initial evidence suggests it was not. New York Times columnist and Nobel Prize-winning economist Paul Krugman is already on record that the stimulus was not nearly large enough and that we need a second stimulus package, pronto. The size? Something on the order of another $400-500 billion.
Part of the problem was the fact that the $787 billion stimulus package did not contain enough front-loaded infrastructure and public works projects -- work that would start quick, within 2-4 months, and that would quickly add $300 billion or more to the U.S. economy. And for that, the Democrats can take the blame (To be consistent, the Republicans deserve some blame too, as most Republicans opposed any stimulus package).
But the goal now should not be the blame game, but ways to increase demand in the economy, and that will like mean more stimulus. If Democrats need to include a tax cut, say a corporate tax cut, to secure votes to ensure passage of a second stimulus package, they should propose one. Underscoring, if the economy demonstrates the need, the focus should be on getting a second, large stimulus package passed to create demand and get this economy moving again.
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Reader Comments (Page 1 of 1)
7-17-2009 @ 9:12PM
Iridium said...
The only stimulus that needs to pass is massive tax cuts. The reason why the stimulus did not work is that the money had to be taken out of the economy before it could be given back in the form of of a giant welfare package.
You give people more money to start with and they will spend it or pay down debt with the extra and spend what they already had.
I don't understand what is so hard to get about that.
7-17-2009 @ 9:54PM
Kent said...
I thought Keynesian economics went out the window when Reagan entered office; but obviously it is having a a grand revival. I see an indelible footprint of Christina Romer (W.H. Chief Economic Advisor) in President Obama's economic stimulus plan. She is a student and advocate of Keynesian economics of the 30's during her academic career at MIT and Berkeley . As we know, it had limited effect until WWII popped its ugly head into the fray. I hope history doesn't repeat itself more ways than one.
7-17-2009 @ 11:26PM
roman said...
The best way to fix the economy is due nothing and let time heal the wounds. Our economy is not the same economy Keynes, or so I hope.
7-18-2009 @ 3:45AM
ij70 said...
lol
7-18-2009 @ 10:12AM
Doug said...
The economy will continue to contract. GM and Chrysler are still closing factories and dealerships. Businesses that depend on them will lay off more workers or close their doors for good. Strip malls here are like ghost towns. Weeds are growing up between the cracks and the landscape looks bleak. The fallout has not stopped. There will be more foreclosures and bankruptcies. Bread lines, soup lines, and tent cities will be a part of the landscape for the first time since the 1930's. NAFTA and GAT took jobs away that were here after the last big recession in the early 80's. The basis of our ecnomy has changed. Far less industry and more service jobs are left. Companies are downsizing to keep from sinking into red ink. The dominos will continue to fall. The new economy will take decades to form. In the northern states, there should be a plan to demolish the old smoke stack factories and empty strip malls that have no chance of occupancy.