Time For the Third Stimulus Package

by L. Randall Wray

According to Paul Krugman “voices calling for stronger stimulus are, may I say, sorta kinda respectable — several Nobelists in the bunch, plus a large fraction of the prominent economists who predicted the housing crash before it happened.”

Professor Krugman provides a link to those who argued that the second stimulus was too small, as well as to those who are already calling for a third stimulus. Three UMKC-affiliated professors are listed, including yours truly. With some immodesty, I’d like to point out that Wynne Godley and I were already calling for a stimulus package in 1999. We were worried that a tightening fiscal stance forced our economy to rely on unsustainable private sector deficits. We said:

“Growing government budget surpluses combined with growing trade deficits have generated record private sector deficits. Unless households continue to reduce their saving—creating an increasingly unsustainable debt burden—the impetus that has driven the expansion will evaporate.”

Of course the economy did quickly collapse into recession, but emerged due to restoration of a budget deficit plus a growing domestic private sector deficit. Over the years, many of us continued to warn that the budget remained too tight while private sector deficits were unsustainable. It all went on far longer than we expected, which does not prove us wrong but rather means that the slump will be immensely worse than it would have been had it come to an end earlier. That is why many of us believe the stimulus is orders of magnitude too small. The private sector is left with a monumental debt overhang and things will not get better until private balance sheets recover.

The best thing that the government can do now is to stop the job losses and to start creating jobs. We are not talking about a couple of million new jobs at this point—we need 6.5 million to replace those already lost, plus another 1-2 million to provide jobs for those who would have entered the labor force (high school and college graduates, for example) if the economy had not collapsed. Reports this morning show that President Obama’s approval rating is falling—below 50% in the swing state of Ohio—and job loss is a big part of the reason. Pessimism is setting in and it will be hard to overcome because it is well-founded. Job losses are devastating for communities—retailers are hit, real estate prices continue to fall, and state and local governments are forced to cut spending.

Many are looking back to 1937, when fiscal policy inappropriately tightened and threw the economy back into depression; indeed the collapse in 1937 was faster than the original crash that started the Great Depression off. To some extent that is not the correct analogy because most of the second stimulus package has yet to be spent, and recent data reported by Mike Norman shows that the federal deficit has actually increased in recent days. But it is still not enough, as evidenced by the growing economic stress around the country.

I realize that it is important for Congress to settle on some dollar figures for a third stimulus because that is the way that budgeting works. But in truth it is impossible to say beforehand how much we will need to stop the carnage. As James Galbraith has been warning, it is better to err on the upside. So far we have done the opposite—with the predictable result that the economy continues on a path toward another great depression.

4 Responses to Time For the Third Stimulus Package

  1. “According to Paul Krugman "voices calling for stronger stimulus are, may I say, sorta kinda respectable — several Nobelists in the bunch, plus a large fraction of the prominent economists who predicted the housing crash before it happened." – Yeah, do you remember, those respectable Nobelists, that were heading Long Term Capital Management and failed spectacularly in the 1990s? Geniuses…I saw the housing crash years before happening and warned about it, so I think my opinion, should count as much as theirs and yours… At least, I hope“Wynne Godley and I were already calling for a stimulus package in 1999. We were worried that a tightening fiscal stance forced our economy to rely on unsustainable private sector deficits.” – Back then in 1999 you argue that USA should not have budget surplus and use it to offset the private debt and the trade deficit. Now you people are calling for a stimulus, when we have budget deficit and unsustainable private debt burden and huge trade deficit. Make your mind! Probably the answer is simply to find way to start producing goods again and eliminate or shrink as much as possible of the trade deficit. My opinion is that, before eliminating the huge trade deficit, you may spend as much money as you want, but it will go either to finance the trade deficit (buying goods from foreigners) or to eliminate the private debt (financing private sector to buy goods made by foreigners). Do you really think people will go shopping with the stimulus money – they will pay debt – see the latest data from 07/09/2009 (retailers are toasted). And the people, who will go out shopping will most likely, buy goods manufactured in foreign country, so they will transfer stimulus money into foreign hands. Right now people are reluctant of buying anything else, than necessities, right now they are NOT “stimulating” the economy of the USA and they are NOT “stimulating” the Worlds economy, US consumers are “saving”/paying the debt they have accumulated, by not producing but only spending.“The best thing that the government can do now is to stop the job losses and to start creating jobs. We are not talking about a couple of million new jobs at this point—we need 6.5 million to replace those already lost, plus another 1-2 million to provide jobs for those who would have entered the labor force (high school and college graduates, for example) if the economy had not collapsed.” – Spend, Spend, Spend,… The truth is the real world does not give a damn about what Nobel award economists think multipliers should be, or for that matter how any economic formulas are supposed to work IN THEORY. In the real world, artificial stimulus may not accomplish anything at all other than driving up national debt. That pretty much sums up what transpired in Japan. Oh sure, if the government gives away enough money, government could easily cause hyperinflation, in theory. However, that would not create any economic activity that anyone wants. Nor will it be tried because it would destroy banks. And about the national debt – In a discussion with Dr Fullwiler in another post, he wrote that I shouldn’t be worried about the deficit: “Deficits were two or three times as large during WWII” and the other day I read in “The 12 step program” – by Stephany Kelton -“Ignore the debt-to-GDP ratio; allow it to drift to whatever value is consistent with an economic recovery and a return to high employment” How is that going to work? First Americas economy had totally different economic structure after WWII, we were more manufacturing than service based economy and second the DOLLAR WAS BACKED UP BY GOLD UP UNTIL 1971. So that in my opinion makes running up deficit in the past incomparable to running up deficit today.

  2. Please elaborate on how this stimulus will be funded and also what areas of the economy should be stimulated?

  3. Dear VRandy and others have explained this in previous posts over the past few weeks.Best,Scott

  4. Cynical Economist,I note that you cast doubts on consumers using stimulus money for consumption. While the situation here in Australia was not as dire to begin with, the consumer "cash splash" approach has been highly effective at underpinning demand – so effective in fact, that even neo-liberal economists have been forced to admit that it worked. This was surely difficult for them as they had whipped themselves into a frenzy trying to convince all of us that such an approach was doomed to swift and total failure.The picture that is emerging seems to be that roughly half the mass cash injection into taxpayer bank accounts were saved while the other half has been spent, with many retailers noting record sales when they should surely have slumped severely in such adverse circumstances.Fiscal policy, when properly used and targetted, can be highly effective.Of course, what we really all need is the kind of job gaurantee advocated by Randy Wray, Bill Mitchell and others.