Time for Stimulus 2.0? The Debate Gains New Urgency

Stimulus debateWith the Federal Reserve adopting a more a pessimistic view of the economic outlook, the revival has been swift in calls for the federal government to do more to help spur growth. But what can it do, and would it be counterproductive?

The Federal Open Market Committee, which sets the Fed's interest rates, issued a downbeat assessment of the economy at its meeting Tuesday, saying "the pace of recovery in output and employment has slowed in recent months."

While it left the Fed's key benchmark rate unchanged -- at between 0% and 0.25%, it can't go any lower -- the FOMC announced that the Fed would take the mildly stimulative step of using the proceeds of maturing mortgage bonds in the Fed's portfolio to buy Treasury bonds. That move is aimed at keeping interest rates low and encouraging banks to lend to customers.

In addition to the Fed's glum assessment, more bad news landed on Wednesday. The Commerce Department reported that the U.S. trade deficit widened to $49.9 billion in June from $42 billion in May. That data, along with downbeat financial reports from China and Britain, helped send world stock prices plunging.

Point, Counterpoint

The first U.S. stimulus package was launched in February 2009, when President Obama signed into law a $787 billion stimulus bill that included tax cuts, infrastructure spending and other measures to spur the economy. In addition, Congress on July 23 passed a $34 billion measure to extend unemployment benefits. And on Tuesday, it passed legislation giving $26 billion to the states for teachers and Medicaid assistance, both likely to help boost spending.

But the recent litany of bad tidings has renewed the debate about whether further stimulus spending is necessary to reinvigorate the economy. And not surprisingly, economists are split in their answers.

Nobel Prize-winning economist Robert M. Solow published an appeal to the government on the Daily Beast website to "get our economy moving again, and soon." He said the federal government could give the economy a push by either increasing public spending or through "carefully targeted" tax reductions.

But Robert Rubin, who served as Treasury Secretary under President Bill Clinton, came out against another round of fiscal stimulus. Speaking on CNN, Rubin said a major new spending would create more uncertainty and undermine confidence.

Government Spending as a Gap-Filler

Augustine Faucher, director of macroeconomics at Moody's economy.com, says the economy would benefit from another $50 billion in aid to states and localities to keep more government employees from being laid off. "We're still going to see substantial layoffs at the state and local level," Faucher says.

Jon Shure, director of the state fiscal project at the Center on Budget and Policy Priorities in Washington, D.C., says the stimulus package adopted in 2009 was the right medicine and needed to be extended.

"It's safe to say that states are going to continue to have problems meeting peoples' needs for the foreseeable future, and it's appropriate for the federal government to be thinking about the role it can play," Shure says. " With the private sector faltering the way it is today, state and local government spending is a huge driver of the national economy."

In addition to more state aid, Faucher says he'd like to see the federal government continue spending on infrastructure projects because of the huge unemployment problem in the construction sector. He also recommends that all of the Bush tax cuts, which are due to expire in January, should be extended for a period of years, including the cuts aimed at the top tax brackets of people earning more than $200,000 a year.

Says Faucher: "Given the fragility of the economy, you don't want to take the risk that higher taxes could upset the people who account for the bulk of spending." However, Treasury Secretary Timothy Geithner says the administration opposes continuing the tax cuts for the wealthy.

More Debt Means Less Growth

Increased federal spending has raised concerns among some economists about the impact on the federal deficit.

In a study published Wednesday, Kenneth Rogoff, a professor of economics at Harvard, and Carmen M. Reinhart, an economics professor at the University of Maryland, examined spending data from 44 countries over 200 years. They found, for example, that public sector debt in the U.S. has reached 117% of GDP in the first quarter of 2010, the highest it's been since reaching 119% of GDP in 1945.

Rogoff and Reinhart concluded that two centuries of statistics show conclusively that "high levels of debt dampen growth." They say that means the bigger the deficit we run today, even in the short term, the longer it will be before economic growth returns to healthy levels and can lift the economy out of the doldrums.

Still, don't expect that to be the last word in the newly refueled stimulus debate.

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538 Comments

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jbjg24m

speaking of dinner, i'm gone !

August 13 2010 at 5:26 PM Report abuse -1 rate up rate down Reply
partsautomall

BEST STIMULUS I CAN THINK OF IS IMPEACH OBAMA

August 13 2010 at 5:05 PM Report abuse rate up rate down Reply
2 replies to partsautomall's comment
leefichter

Should have impeached Bush X 2! Obama inherited a "LOAD OF BUSHIT"

August 25 2010 at 9:28 PM Report abuse rate up rate down Reply
leefichter

Should have impeached Bush X 2! Obama inherited a "LOAD OF BUSHIT"

August 25 2010 at 9:29 PM Report abuse rate up rate down Reply
telebob52

another stimulus...sure why not...whenever im in financial trouble i borrow against my house...max out all my credit cards....take out loans...borrow from family and friends...whatever it takes.Then i use that money for trips and vacations,dining out,beer...i throw parties for everyone...just have a great time and that usually gets me out of my jam.I went to the same math class as O...Barney....Dodd...Tim...Ben...Nancy

August 13 2010 at 4:52 PM Report abuse +2 rate up rate down Reply
1 reply to telebob52's comment
eversharp57

---track record of competence------ She can do circles around the guy in the WH now, both in experience and in getting things done. You don't have to like her but you do have to admit she took on both parties and cleaned house of corruption. Obama is unwilling to even try, but then he'd have to clean up his act too. Different goals. I think she's got guts and is a tremendously determined person. I wish to heck we had someone with her drive and actual love of country leading us. While I respect your right to voice an opinion, I will sure exercise mine too. Was BO even a boy scout? All we know is that he was the ACORN lawyer while they were shaking their fists at bankers and threatening them. What else has he accomplished? Gotta go, late now. Just think on it.

August 13 2010 at 4:14 PM Report abuse +4 rate up rate down Reply
1 reply to eversharp57's comment
eversharp57

Let me repeat: afro, do you buy into all the gossip the democrats spoon feed you about Palin? Ever checked it out to see if anyone can actually prove it? I seriously doubt that you have, or that it's true. And until you're sure you shouldn't be spreading what is probably nothing more than dirty dem lies.

August 13 2010 at 4:04 PM Report abuse +4 rate up rate down Reply
1 reply to eversharp57's comment
eversharp57

Let me remind you that out of the 10 people Palin endorsed in their campaigns, 7 took the honors. Not bad, and darn site better than those who Obama endorsed.

August 13 2010 at 4:00 PM Report abuse +2 rate up rate down Reply
1 reply to eversharp57's comment
eversharp57

Palin said early on that she'd back anyone who had the values our country needs in office regardless of whether they were Republican or Independent. While the GOP gets blamed for being party first and country second, we see proof all the time that it's the other way around, that's the democrat way. Palin is proof that she's looking for candidates with values and who really do give a damn about the country instead of longstanding politicians who always turn out to be self-serving. I have to admire that. She's bucking the good ole' boys. And when the good ole' boys are life long politicians that's a good thing.

August 13 2010 at 3:54 PM Report abuse +3 rate up rate down Reply
1 reply to eversharp57's comment
onemightylight

beuf---"it was unneeded foodtamp money that was set aside."------? Now there's a comment I'd like to see the link to! Can I suggest you increase your resources of reading material? Gotta go and get with the program again. Have fun guys. :)

August 13 2010 at 3:45 PM Report abuse +4 rate up rate down Reply
onemightylight

Beuf, it was not Red. Give the guy a break when you're not sure, and I am sure. Razz told me who it is. Leave it there, okay?

August 13 2010 at 3:12 PM Report abuse +2 rate up rate down Reply
onemightylight

I'm fine beuf! Just busier than a one-armed paper hanger! Remodeling the kitchen is a real mess. How about you? Word got to me you're blaming the wrong person for cloning our friend Razz. She knows who it is, and you are on the wrong person. You do need to know that.

August 13 2010 at 3:04 PM Report abuse +3 rate up rate down Reply