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March 20th, 2009

Another Stimulus? What Do You Say

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Nearly every critic of the president’s Economic Recovery and Reinvestment Act (ERRA — the latest stimulus package) argued that the bill was far too expensive and would not promptly impact the economy. Others argued that the stimulus wasn’t big enough.

The Wall Street Journal’s blog ‘Real Time Economics’ brought two economists together with opposing views on the subject to present their arguments.

Ian Shepherdson of High Frequency Economics feels that another stimulus worth approximately $1 trillion “would greatly reduce both the depth and length of the recession.”

He argues that the administration’s $787 billion stimulus is not large enough to help erase the vast amount of the nation’s household debt and that the ERRA isn’t large enough to both erase a portion of the household debt as well as stimulate consumer spending:

In the short-term, though, every dollar saved is a dollar not spent, which is why the economy is contracting so rapidly. A further round of fiscal stimulus would help facilitate the necessary increase in savings while limiting the damage done to consumer-dependent businesses across the country.

On the flip side, Stephen Stanley of RBS Greenwich Capital feels the ERRA doesn’t have what it takes — citing the failure of the past administration’s $100 billion stimulus package:

The problem is that Keynesian stimulus is designed to induce households to save less and spend more. Currently, households need to save more and are finally beginning to do so. Having the federal government borrow money just so households can save it is an exercise in futility.

Stanley also points out that by using a “modern macroeconomic model instead of a 1950s-era model” to estimate the fiscal impact of the stimulus package, it calculates that the economic impact in 2009 will be minimal, and the impact by 2010 will be only one-sixth of the administration’s estimate.

What do you think? Is the country in need of another stimulus?

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