Friday, June 19, 2009

Fiscal Stimulus II

See this from the Center on Budget and Policy Priorities:

And on intrade, I see that "the market" says that unemployment will be above 10.75% by December, with an 18% chance of topping 12%!

If in government, I would propose a swift, immediate transfer of about $400 billion to state and local governments to be used for deficit reduction, preventing the cutting of necessary services, preventing more tax hikes, and stimulus, letting the states decide whether to give temporary tax cuts or fund more public infrastructure projects.

It was clear back in February that the stimulus was imprudently small -- that if things got better, it could be scaled back and we really wouldn't have lost much, but that if things got worse, it might be tough politically to send another stimulus back through the Congress, with the Republicans no doubt jabbering about how, why, if the first stimulus failed, why you'd want to throw more good money after bad. And now the public is stupidly more concerned with deficit reduction than fighting the recession.

What I suspect will happen is this: the economy will continue to muddle along, perhaps with slowing unemployment losses, but more or less along a trajectory of 11% unemployment by years end and 12+ sometime next year, by which time GDP may stop contracting, and then we'll go through a whole 'nuther year or so of just very slow growth and a very weak economy. Without any genuine cliff-diving, we won't get another stimulus, but just a Japanese-style muddle.

For this we can thank that brilliant wunderkind Larry Summers.

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