Second Stimulus: Too Soon to Discuss or Too Late to Implement?

Washington DC, US, 11 July 2009. Obama’s stimulus package has been criticized for being both too small and too big, but most economists are against more such stimulus, despite the dismal economic outlook.

According to The Wall Street Journal, only eight of 51 economists said further stimulus is needed, reccommending an average of around $600 billion, on top of the existing $787 billion stimulus package.[br]

Washington DC, US, 11 July 2009. Obama’s stimulus package has been criticized for being both too small and too big, but most economists are against more such stimulus, despite the dismal economic outlook.

According to The Wall Street Journal, only eight of 51 economists said further stimulus is needed, reccommending an average of around $600 billion, on top of the existing $787 billion stimulus package.[br]

Nobel Prize winning economist Paul Krugman doesn’t think it’s a matter of economists not wanting to see recovery. In a New York Times piece he wrote, “They’re saying that they don’t like stimulus. And why should you be surprised? These are business economists; they’re generally conservative.”

Krugman is stumped by their expectations of delation in the US economy, while unemployment is on the rise.

“Now, if you think that unemployment is going to be at or above current levels for the next 18 months, wouldn’t you think there would be a significant risk of deflation? In fact, however, the average forecast is for an inflation rate of 1.7 percent next year. What’s the logic?”

He argues this is more reason for additional stimulus, for deflation is far more harmful than mild inflation.

Others claim that it is simply too soon to discuss the effects of the package, and one can’t expect immediate results in a $14 trillion economy.[br]

Bruce Bartlett, in the Financial Times insisted that the stimulus, “…must be given time to work. People should not allow their impatience to lead to the adoption of policies that will not only fail to reduce unemployment this year, but could stoke inflation in the not-too-distant future.”

Perhaps if the Obama administration had been a bit more open about the real severity of the economic conditions, the publics’ expectations would have been more realistic. Harvard economist Greg Mankiw said the administration has “not been particularly forthright.”

Mankiw opines that either this stimulus has been a failure for not cutting unemployment as it promised (indeed, unemployment is significantly higher than promised from the Obama stimulus) or their initial baseline assesment was much worse than they thought to begin with.

As long as people believe that a quick injection of cash will revive things as fast as markets can crash, expectations will not ever be realistic, and people will not be prepared for the long road to recovery needed.

But when “restoring confidence” is the order of the day in a falling economy, it is very hard for politicians to put forth an apocolyptic story simply to prepare citizens for a long, arduous recovery.

In the meantime, it is easy to be a critic. Many are quick to say the package failed, citing high inflation and an overall uncertian recovery path.

Economist Nicholas Perna, from Perna Associates is one of the few surveyed by The Wall Street Journal who thought more stimulus funds should be in order. He said, “The most obvious reason is the need to offset the large fiscal drag just getting under way as state and local governments raise taxes and cut spending as they attempt to balance their budgets.”

Indeed, it will take time. “Lags in monetary and fiscal policy actions” need time to “work through the system,” as noted by Allen Sinai of Decision Economics.

Umberto Osman, EconomyWatch.com