Stimulus package must be drastic
Shawkat Hammoudeh
Issue date: 1/30/09 Section: Ed-Op
Almost every rational individual on this planet knows by now that the United States is undergoing a severe recession that has the potential to upgrade itself to a second Great Depression. Bad monetary policies under former Federal Reserve Chairman Alan Greenspan and imperial overstretching under former President George W. Bush have substantially contributed to it. The $700 billion of the Troubled Asset Relief Program money under former Treasury Secretary Henry Paulson also has not done us much good - it did not succeed in getting bad assets off financial institutions' balance sheets as was its original intent. Now more policymakers and economists are warming up to the idea of establishing a "bad bank" that will quarantine the toxic assets. This proposed bank is currently called the "good, bad" bank. Moreover, monetary policy under Federal Reserve Chairman Ben Bernanke has not kept up with this recession so far, because it stands up against a zero bound interest rate, better known as a liquidity trap. Using the Taylor rule, Goldman Sachs estimates that interest rates should go down to negative 6 percent for the economy to boot itself out of this recession. But interest rates can not go below zero, and banks in this case would just hoard cash. Unconventional monetary policy in the form of quantitative easing has not stimulated the economy nor helped the consumer price index to stop sliding. The urban CPI increased by only 0.1 percent during 2008, the lowest increase since 1954. Both the wage CPI and chained urban CPI dropped from December 2007 to December 2008, registering a negative annual inflation - deflation, a condition worse than inflation.
The life of this strong recession is estimated to range between two to four years, if no huge fiscal stimulus is undertaken by the Obama administration. If things go this way regardless of a stimulus, the unemployment rate will be in the double-digits and the output gap will be well above 10 percent, which requires a huge stimulus to fill it in. This should translate into at least $1.5 trillion GDP loss for each year of the recession, totaling $6 trillion for four years - or almost half of the current GDP. If it takes the estimated $50,000 increase in GDP to create one job, then if we use the reverse route, a $1.5 trillion loss in GDP will translate into 3 million jobs lost in one year - 12 million in four years - in addition to the 11 million who are currently looking for jobs but cannot find them. This is a staggering number that carries many social and political ramifications.
The life of this strong recession is estimated to range between two to four years, if no huge fiscal stimulus is undertaken by the Obama administration. If things go this way regardless of a stimulus, the unemployment rate will be in the double-digits and the output gap will be well above 10 percent, which requires a huge stimulus to fill it in. This should translate into at least $1.5 trillion GDP loss for each year of the recession, totaling $6 trillion for four years - or almost half of the current GDP. If it takes the estimated $50,000 increase in GDP to create one job, then if we use the reverse route, a $1.5 trillion loss in GDP will translate into 3 million jobs lost in one year - 12 million in four years - in addition to the 11 million who are currently looking for jobs but cannot find them. This is a staggering number that carries many social and political ramifications.
Be the first to comment on this story