Pumping Life Back into the U.S. Economy

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www.americanprogress.org AP Photo/file Pumping Life Back into the U.S. Economy Why a Stimulus Package Must Be Big and Targeted Scott Lilly January 2009 In this 1932 fle photo, long line o 2 jobless and homeless men wait outside to get 2ree dinner at New York 9s municipal lodging h ouse during the Great Depression. Pumping Life Back into the U.S.

Economy Why a Stimulus Package Must Be Big and Targeted Scott Lilly January 2009 &v C"n/"r #+r Am"r&can Pr+gr"ss | Pump&ng l&#" Back &n/+ /%" U.S. ec+n+my Introduction Be9ore 9ederally sponsored elecGric cooperaGives exGended Ghe magic o9 elecGriciGy Go rural America, many in our counGry goG Gheir waGer by using a backyard hand pump. Tese pumps were simple yeG remarkable Gools.

Tey could produce gallons upon gallons o9 waGer 9rom deep below Ghe sur9ace o9 Ghe earGh wiGhouG greaG exerGion. BuG be9ore any waGer would ow, Ghe users o9 Ghese pumps had Go make cerGain GhaG Ghere was a solid column o9 waGer 9rom Ghe level o9 Ghe underground reservoir Go Ghe base o9 Ghe pump. SomeGimes, Ghey had Go pour waGer inGo Ghe ground be9ore Ghey could pump larger quanGiGies ouG.

cPriming Ghe pump d is a meGaphor GhaG economisGs have ... more. less.

9requenGly used Go explain a policy o9 using governmenG de ciGs Go resGore Ghe circulaGion o9 goods, services, and money in a sGruggling economy. As our economy conGinues Go deGerioraGe a\x4er nearly a year in recession, Ghe quesGion o9 pump priming becomes a cenGral issue in public discourse. BuG Ghere are a number o9 quesGions GhaG need Go be addressed be9ore enacGing any economic sGimulus plan. Tese include: Won 9G economic sGimulus add Go Ghe 9ederal budgeG de ciG when our GoGal public debG is " already ouG o9 conGrol? Who will lend Ghe 9ederal governmenG Ghe 9unds Go cover Ghe expecGed increase in Ghe " budgeG de ciG? How much economic sGimulus is necessary? " How should a sGimulus package be sGrucGured? " In Ghe pages GhaG 9ollow, Ghis paper will examine each o9 Ghese quesGions in Gurn, beginning wiGh a hisGorical analysis o9 governmenG de ciG spending and ending wiGh an analysis o9 whaG exacGly needs Go be done. Te purpose: Go explain why a large buG GargeGed economic sGimulus package is criGical Go cope wiGh an even more severe recession in 2009 Ghan we 9ve already experienced in 2008. in/r+duc/&+n | www.am"r&canpr+gr"ss.+rg 1 This paper (like others that discuss the Great Depression) is greatly disadvan- taged by the lack o: quality statistical collection during that period. There was no Consumer Price Index or monthly survey o: households or employers. There were no National Income and Product Accounts and thus no truly reliable measure o: industrial output, personal income or consumption. The idea o: a System o: National Accounts was introduced by the Commerce Department in 1937; the concept o: Gross National Product or Gross Domestic Product was not :ully developed until World War II. As a result, the statistics used in this paper :rom the 1920s and 1930s are based on the e\x3orts o: analysts who combed through what data was available and at- tempted to make the best estimates possible given the lack o: real data. Our true knowledge o: how many people were unemployed, how much prices \x2uctuated or how much the economy grew or shrank within a given time period is signi - cantly less reliable than the types o: measures we have today. This limits our capacity today to :ully understand what took place during the Great Depression. And back then, it placed severe limits on the capacity o: President Herbert Hoover and then President Franklin Delano Roosevelt to comprehend and cope with downward spiral that gripped the nation. Amid the current crisis we should :eel :ortunate :or the investments made in a system that gives us :ar more precise and timely in:ormation :or understanding economic change. Measuring Economic Performance 2 C"n/"r #+r Am"r&can Pr+gr"ss | Pump&ng l&#" Back &n/+ /%" U.S. ec+n+my Deficits and depressions Many people nd iG di\x3culG Go accepG GhaG iG would be a good Ghing 9or Ghe 9ederal govern- menG Go deliberaGely increase Ghe 9ederal budgeG de ciG even 9urGher when Ghe de ciG in Ghe scal year GhaG jusG ended GoGaled $455 billion, and when Ghe de ciG in Ghe currenG scal year could be Gwice GhaG size even wiGhouG a sGimulus package. Indeed, GoGal public debG (exclud- ing debG owed by Ghe 9ederal governmenG Go iGsel9) now sGands aG $5.8 Grillion 4more Ghan 70 percenG bigger Ghan iG was 8 years ago. Why should we deliberaGely add more? FirsG o9 all, iG is imporGanG Go undersGand GhaG our siGuaGion wiGh respecG Go Ghe public debG is noG nearly as bad as Ghose gures mighG seem. Measuring Ghe debG burden o9 naGions is noG dissimilar Go measuring Ghe debG burden o9 individuals or 9amilies. Someone who owes $100,000 can be eiGher in very bad nancial shape or very good nancial shape depending on his or her level o9 income. A person who works aG Ghe minimum wage could be in real Grouble carrying a debG o9 $100,000, buG a million dollar-a-year execuGive could handle such a debG wiGh ease. Te U.S. economy is currenGly esGimaGed Go be abouG $14.5 Grillion, which means Ghe $5.8 Grillion public debG equals abouG 40 percenG o9 gross domesGic producG. TaG is acGually much lower Ghan iG was in Ghe early 1950s 4and much lower Ghan Ghe debG held by mosG oGher economically developed counGries. 1 Lessons of the Great Depression and the New Deal During Ghe 1920s Ghe UniGed SGaGes rapidly paid down Ghe debGs iG had builG up 9rom World War I. DespiGe Ghe sGock markeG crash in 1929, Ghe 9ederal governmenG conGinued Go mainGain an exGraordinarily GighG scal policy, running a budgeG surplus in 1930 and only a small de ciG in 1931. By 1930, GoGal public debG sGood aG 18 percenG o9 GDP. BuG Ghe scal discipline exercised by Congress and Ghe Hoover adminisGraGion, coupled wiGh a GighG moneGary policy and proGecGionisG Grade policies, proved Go be very bad medi- cine. UnemploymenG swelled 9rom a litle more Ghan 3 percenG in 1929 Go nearly 9 percenG in 1930, Go more Ghan 16 percenG in 1931, and Go nearly 25 percenG in 1932. In nominal dollars, Ghe overall size o9 Ghe economy was reduced by 40 percenG in only Ghree years. D"#&c&/s and d"pr"ss&+ns | www.am"r&canpr+gr"ss.+rg 3 Te eforG Go mainGain a balanced budgeG in Ghe 9ace o9 economic collapse 9ell aparG in 1931. 0ax collecGions 9or scal year 1932 4which began in July o9 1931 49ell Go less Ghan hal9 Ghe amounGs collecGed only Gwo years earlier. AG Ghe same Gime, demands 9or relie9 9rom Ghe American people overwhelmed Ghe capaciGy o9 Congress and Ghe WhiGe House Go resisG swelling Ghe scal 1932 budgeG de ciG Go only slighGly less Ghan 5 percenG o9 GDP. Te 1933 de ciG was nearly GhaG large. Franklin D. RoosevelG was sworn inGo o\x3ce in March o9 1933, and while he generaGed a hosG o9 new approaches Go dealing wiGh Ghe economic policy, his de ciG policy did noG deviaGe signi canGly 9rom Hoover 9s GighG sGedness. Te de ciG 9or scal 1934, which began abouG 14 weeks a\x4er RoosevelG was inauguraGed, was 5.4 percenG o9 GDP. TaG would be equivalenG Go a budgeG de ciG in Goday 9s economy o9 $780 billion 4abouG 70 percenG big- ger Ghan Ghe $455 billion de ciG we had in scal 2008 4buG only slighGly larger as a share o9 GDP Ghan Ghe lasG Gwo Hoover budgeGs. FurGher, Ghe RoosevelG adminisGraGion was unwilling Go allow de ciGs Go rise above GhaG level despiGe Ghe 9acG GhaG unemploymenG was declining aG an exGremely slow pace. AG Ghe beginning o9 scal 1935 4when Ghe budgeG de ciG was cuG back Go 4 percenG o9 GDP 4 unemploymenG was above 21 percenG. A somewhaG larger de ciG in 1936 saw Ghe unem- ploymenG raGe 9all Go 17 percenG. Te economy was no longer in a Gailspin, buG iG conGinued Go sputer, and Ghe level o9 human misery and nancial pain conGinued Go be enormous. NoneGheless, by 1936 Ghere was increasing pressure Go resGore scal discipline. During s- cal 1937 (which began in July 1936) Ghe de ciG was shaved Go 2.5 percenG o9 GDP and Ghe 9ollowing year ( scal 1938) Ghe de ciG was almosG eliminaGed (-0.1 percenG). Economic hisGorian Price Fishback has writen in a recenGly published book, Governmen9 and 9he American Economy, A New His9ory , GhaG RoosevelG was never convinced o9 Ghe use o9 gov- ernmenG spending as a 9orm o9 scal sGimulus: Roosevel9 was +ollowing a +ar more conserva9ive pa9h because he, like Hoover, sough9 9o avoid leaving 9he +ederal budge9 9oo +ar ou9 o+ balance&As a resul9 9he +ederal budge9 de ci9 was never very large rela9ive 9o economic shor9+alls during 9he 1930s. Wri9ing in 1941, Alva Hansen, a major gure in aiding 9he di\x4usion o+ Keynesian 9hough9 in 9he economics pro+ession s9a9ed, cDespi9e 9he +airly good showing made in 9he recovery up 9o 1937, 9he +ac9 is 9ha9 nei9her be+ore nor since has 9he adminis9ra9ion pursued a really posi9ive expansionis9 program&+or 9he mos9 par9 9he +ederal governmen9 engaged in a salvaging program and no9 in a program o+ posi9ive expansion. In January 1938, PresidenG RoosevelG said in Ghis SGaGe o9 Ghe Union address: We have heard much abou9 a balanced budge9, and i9 is in9eres9ing 9o no9e 9ha9 many o+ 9hose who have pleaded +or a balanced budge9 as 9he sole need now come 9o me 9o plead 4 C"n/"r #+r Am"r&can Pr+gr"ss | Pump&ng l&#" Back &n/+ /%" U.S. ec+n+my +or addi9ional governmen9 expendi9ures a9 9he expense o+ unbalancing 9he budge9. As 9he Congress is +ully aware, 9he annual de ci9, large +or several years, has been declining 9he las9 scal year and 9his. Te proposed budge9 +or 1939, which I shall shor9ly send 9o 9he Congress, will exhibi9 a +ur9her decrease in 9he de ci9, 9hough no9 a balance be9ween income and ou9go. 2 BuG only a 9ew monGhs laGer 4as scal 1938 drew Go an end 4iG became apparenG GhaG harsh budgeG discipline once again had a negaGive impacG on Ghe naGion 9s 9ragile economy. Te growGh GhaG had occurred since 1933 was reversed. Commerce DeparGmenG hisGorical sGaGisGics indicaGe GhaG Ghe U.S. economy was abouG 3 percenG smaller by Ghe end o9 1938 Ghan iG had been aG Ghe end o9 1937. Similarly, unemploymenG rose Go 19 percenG in 1938 a\x4er declining Go 14.3 percenG in 1937. UnemploymenG remained Goo high and household demand 9or goods and services remained Goo weak Go permiG Ghe governmenG Go abandon Ghe eforG 9or sGronger growGh. 1940 was Ghe beginning o9 recovery noG because o9 sGimulus 9rom Ghe U.S. 0reasury, buG because 9oreign governmenGs were borrowing Go prepare 9or war and a porGion o9 Gheir purchases were 9or American-made producGs. U.S. exporGs increased by more Ghan 25 per- cenG in 1940, and by an even larger amounG in 1941. ExporGs in 1941 exceeded imporGs by $1.8 billion (1.5 percenG o9 GDP) which on Gop o9 a $5.6 billion budgeG de ciG (4.9 per- cenG o9 GDP) gave Ghe U.S. economy Ghe push iG had long needed. UnemploymenG in 1941 9ell Go slighGly under 10 percenG 9or Ghe rsG Gime in 12 years. 3 The lessons of World War II AlGhough Keynesians could noG convince policymakers in WashingGon GhaG Ghe key Go economic recovery was 9or Ghe 9ederal governmenG Go use iGs crediG Go borrow and spend sums large enough Go spark growGh and resGore con dence, Ghe Japanese Imperial Navy proved Go be more persuasive. In Ghe wake o9 Pearl Harbor Ghe 9ederal budgeG de ciG 9or scal 1942 jumped Go 14.2 percenG o9 GDP as unemploymenG dropped Go 4.7 percenG. World War II pushed de ciGs sGill higher in Ghe ensuing years, reaching nearing 30 percenG o9 GDP in 1943 be9ore 9alling back Go 23 percenG in 1944 and 22 percenG in 1945. Te GoGal public debG, which had risen 9rom 18 percenG o9 GDP in 1930 Go 42 percenG in 1940, swelled Go 109 percenG by 1946. A\x4er Ghe war, Ghe U.S. economy had su\x3cienG vigor GhaG Ghe major concern was rising prices and noG declining growGh. While Ghe 9ederal budgeG was rarely balanced or in surplus during Ghe early decades 9ol- lowing World War II, Ghe size o9 Ghe de ciGs in all buG a 9ew years were U.S. exports and imports 1929 to 1942 (in billions) $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 1929 1931 1933 1935 1937 1939 1941 Source: Historical Statistics o( the United States, cColonial Times to 1970, Part 2 Chapter U, d available at http://www2. census.gov/prod2/statcomp/documents/CT1970p2-08.pd(. Deficits and unemployment 1929 to 1949 (de:icits expressed as percent o: GDP) 30% 25% 20% 15% 10% 5% 0% 1929 1931 1933 1935 1937 1939 1941 1943 1945 1947 1949 Unemployment De cits Source: Historical Statistics o( the United States, cColonial Times to 1970, Part 1 Chapter D d available at http://www2.census.gov/prod2/statcomp/documents/CT1970p1-05.pd(. Exports Imports D"#&c&/s and d"pr"ss&+ns | www.am"r&canpr+gr"ss.+rg 5 smaller Ghan Ghe raGe o9 economic growGh. As a consequence Ghe debG sGeadily shrank as a share o9 GDP. By Ghe early 1970s, Ghe public debG had dropped Go 25 percenG o9 GDP. The last three decades Te sGeady improvemenG in Ghe size o9 Ghe naGion 9s GoGal debG relaGive Go annual GDP growGh sGagnaGed in Ghe 1970s and abrupGly reversed course in Ghe 1980s as Ghe 9ederal governmenG simulGaneously acceler- aGed miliGary procuremenG and slashed Gax raGes. By 1993, GoGal public debG as a percenGage o9 GDP had nearly doubled 9rom Ghe levels o9 Ghe 1970s, sGanding aG slighGly less Ghan 50 percenG. A new era o9 scal resGrainG GhaG began in Ghe early 1990s broughG GoGal public debG back down 9rom 49.4 percenG o9 GDP aG Ghe end o9 scal 1993 Go 33 percenG by Ghe end o9 scal 2001. BuG Ghe course was again reversed when Gax cuGs were adopGed in 2001, 2002, and 2003, accompanied by miliGary acGion in boGh A9ghanisGan and Iraq. 0oGal public debG was equal Go 37 percenG o9 GDP by Ghe end o9 2007 and 40 percenG by Ghe end o9 2008. Where we stand today Te UniGed SGaGes is noG in as good o9 nancial shape as iG mighG be or as many mighG argue iG oughG Go be. BuG our governmenG 9s nancial condiGion is much beter Ghan iG was aG oGher poinGs in our hisGory, mosG parGicularly in Ghe decades 9ollowing World War II. Our public nances are also in much beter shape Ghan Ghose o9 mosG oGher devel- oped economies. An analysis published by Ghe CenGral InGelligence Agency earlier Ghis year showed GhaG Japan 9s public debG equals 182 percenG o9 GhaG coun- Gry 9s GDP while IGaly 9s equals 106 percenG, Belgium 86 percenG, France 66 percenG, Germany 65 percenG, and Canada 64 percenG. TaG same sGudy measured Ghe U.S. public debG aG only 37 percenG 9or Ghe same period ending in 2007. Te U.S. economy, in shorG, can handle Ghe sGrain o9 increased de ciG spending. 4 U.S. public debt as a percentage of GDP 1929 to 2007 Public debt as percentage of GDP For 15 developed countries in 2007 110% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% 182% 106% 86% 67% 66% 65% 64% 61% 48% 43% 42% 39% 37% 36% 26% 1930 Japan Italy Belgium France 1940 Portugal Germany 1950 Canada 1960 1970 1980 1990 2000 Australia Netherlands U.K. Sweden Norway U.S. Spain Denmark Source: Historical Statistics o( the United States, cColonial Times to 1970, Part 1 Chapter F, d available at http://www2.census.gov/prod2/statcomp/documents/CT1970p1-07.pd(. Source: Central Intelligence Agency, cThe World Factbook 2008, d available at https:// www.cia.gov/library/publications/the-world-(actbook/. 6 C"n/"r #+r Am"r&can Pr+gr"ss | Pump&ng l&#" Back &n/+ /%" U.S. ec+n+my What are the current limits on U.S. borrowing? BuG who will loan Ghe 9ederal governmenG all o9 Ghe money necessary Go nance large de - ciGs? Will our naGion 9s crediGors conGinue Go loan su\x3cienG amounGs as Ghe 9ederal public debG grows larger? Te answer is GhaG much o9 Ghe world seems noG only willing buG anx- ious Go invesG in U.S. 0reasuries, which are seen as Ghe sa9esG securiGy GhaG an invesGor can own in a risky world economy. A major problem now 9aced by Ghose Grying Go raise capiGal in Ghe privaGe secGor is GhaG invesGors would pre9er Go own U.S. 0reasuries even i9 Ghey yield a Ghird or even a quarGer o9 Ghe reGurn ofered by borrowers in Ghe privaGe secGor. InvesGors around Ghe world are ready Go cash in Gheir 9oreign bank deposiGs, corporaGe bonds, sGocks, and even Gax-9ree municipal bonds in 9avor o9 U.S. 0reasuries despiGe yields GhaG are near Gheir all-Gime lows. TaG con dence would surely erode i9 Ghe size o9 our GoGal public debG began Go approach Ghe size o9 our annual GDP. BuG aG 40 percenG o9 GDP we are noG close Go GhaG siGuaGion. Even wiGh several years o9 very healGhy in9usions o9 de ciG- nanced sGimulus we will noG reach GhaG poinG in Ghe near 9uGure. A $1 Grillion-dollar 9ederal budgeG de ciG in 2009, 9or example, would push Ghe public debG Go abouG 47 percenG o9 GDP, and a $2 Grillion-dollar de ciG will push iG Go only abouG 53-percenG levels 4only a 9ew percenGage poinGs above where iG was in Ghe early 1990s. TaG would leave signi canG room 9or addiGional de ciGs in subsequenG years and sGill main- Gain a debG-Go-GDP raGio 9ar beter Ghan mosG oGher developed economies and 9ar beter Ghan we ourselves had in Ghe years 9ollowing World War II. We may noG need economic sGimulus o9 GhaG magniGude. And Ghe 9ederal governmenG may noG be capable o9 managing a sGimulus package o9 GhaG magniGude. BuG i9 iG were necessary Go engage in GhaG level o9 sGimulus, we could do so and recover in a relaGively rapid manner once Ghe economy had regained iGs 9ooGing, leading Go a reGurn in Ghe decline o9 our GoGal public debG relaGive Go GDP growGh. The importance of fiscal discipline Tis brie9 hisGory o9 our naGion 9s sGruggle wiGh scal policy over Ghe pasG 75 years does noG documenG Ghe view 9amously atribuGed Go Vice PresidenG Dick Cheney, who said, cde ciGs don 9G mater. d 5 QuiGe Go Ghe conGrary, consGraining Ghe public debG is clearly an imporGanG W%a/ ar" /%" curr"n/ (&m&/s +n U.S. b+rr+w&ng? | www.am"r&canpr+gr"ss.+rg 7 goal because iG provides Ghe naGion wiGh Ghe laGiGude Go Gake Ghe sGeps necessary Go correcG a 9ailing economy when such sGeps become necessary. Te choices we have Goday mighG be quiGe diferenG had Ghe deGerioraGion in Ghe size o9 our debG relaGive Go Ghe size o9 our economy GhaG Gook place in Ghe 1980s and early 1990s conGinued 9or Ghe remainder o9 Ghe 1990s. BeGween 1981 and 1993 our debG as a share o9 GDP grew 9rom 25.8 percenG Go 49.4 percenG. I9 iG had conGinued on GhaG GrajecGory Ghrough Ghe early parG o9 Ghe currenG decade, reaching 75 Go 85 percenG o9 GDP, we would 9ace considerably 9ewer opGions. BuG i9 we had exercised sGricGer scal discipline over Ghe pasG eighG years under PresidenG George W. Bush, Ghen we would be in a somewhaG sGronger posiGion Go meeG a prolonged economic crisis. WhaG 9s worse, deeply inepG moneGary policy and economic oversighG so 9ar Ghis decade leaves Ghe incoming Obama adminisGraGion and 111Gh Congress 9acing an economic crisis diferenG 9rom any since Ghe GreaG Depression. Understanding our predicament: cThis is not your father 9s business cycle d In July 2004, Paul Krugman spoke aG a symposium organized by Ghe CenGer 9or American Progress on Ghe prospecGs o9 Ghe currenG economic recovery. Krugman Gold Ghe group, cTis is noG your 9aGher 9s business cycle. IG 9s your grand9aGher 9s business cycle. d He likened Ghe currenG business cycle Go Ghe 1920s or cGhe panic o9 1873, when Ghey builG more rail- roads Ghan Ghey acGually had Gra\x3c 9or. d He explained: We 9re all a litle bi9 a9 sea here because 9his is no9 a 9ypical economic recovery, no9 a 9ypical pos9-war economic recovery, anyway&Te main source o+ weakness here... is 9ha9 wages and salaries o+ all kinds, including salaries o+ highly paid people are lagging +ar behind economic grow9h, so disposable incomes is no9 rising nearly as +as9 as 9he economy, which makes you wonder whe9her consumer demand will keep on growing +as9 enough 9o sus9ain 9his ra9e o+ grow9h. I 9hink 9he answer has 9o be 4I know 9he background paper 9ha9 CAP has produced says 9his 4consumer demand is no9 going 9o keep on growing a9 recen9 ra9es. I9 migh9 even 9urn down because 9here is a lo9 o+ build up o+ consumer deb9 because 9he home re nance boom is no9 going 9o keep delivering cash in9o people 9s hands. 6 Te CAP background paper re9erenced by Krugman argued GhaG despiGe Ghe con dence being expressed by Ghe Bush adminisGraGion and Ghe Federal Reserve, Ghe economy was already in serious Grouble. 7 TaG Grouble was rooGed in Gwo problems. Wage growGh had 9allen 9ar behind Ghe growGh in worker producGiviGy. TaG meanG GhaG " while Ghe economy could produce more goods and services, Ghere was noG su\x3cienG purchasing power Go consume Ghem. TaG Grend has conGinued. Since 2000, worker producGiviGy has increased 20 percenG while wages have increased by less Ghan 1 percenG. 8 C"n/"r #+r Am"r&can Pr+gr"ss | Pump&ng l&#" Back &n/+ /%" U.S. ec+n+my During Ghe same period, employmenG growGh has noG kepG pace wiGh populaGion growGh and so household incomes have 9allen. WiGhouG growGh in income, consumers were unable Go make Ghe increased purchases necessary Go susGain economic expansion. 8 Te policy chosen by Ghe Bush adminisGraGion and Ghe Federal Reserve Go remedy Ghis " problem was over Gime cerGain Go 9ail, leaving Ghe U.S. economy in 9ar worse shape. Lowering inGeresG raGes below Ghe raGe o9 in aGion provided power9ul incenGives Go bor- row and spend. IG encouraged spending on producGs ranging 9rom cars Go vacaGions and had a parGicularly power9ul impacG on housing. AG Ghe same Gime, aG Go declining real wage growGh (a\x4er 9acGoring in in aGion) led consumers Go pay 9or more and more o9 Gheir everyday needs 49rom college GuiGion Go medical expenses Go grocery bills 4wiGh crediG. Tese policies conGinued Go drive an overheaGed housing markeG and 9osGered a re nance boom GhaG sucked Grillions o9 dollars ouG o9 home equiGy and inGo cash Go gen- eraGe an unsusGainable level o9 consumer demand. VirGually all o9 Ghe economic expan- sion GhaG occurred in 2002, 2003, and early 2004 was Ghe resulG o9 consumer spending and GhaG was enGirely nanced wiGh debG. 9 A Ghird problem noG yeG visible aG Ghe Gime o9 Ghe CenGer 9s 2004 symposium was Ghis: Te morGgage re nance and housing boom had 9ully peneGraGed Ghe universe o9 quali ed borrowers and buyers, prompGing nancial insGiGuGions GhaG had made billions in pro Gs of GhaG boom Go press Gheir morGgage conGracGs and noGary sGamps upon increasingly less crediGworGhy borrowers. MorGgage and invesGmenG bankers knew plenGy o9 insGiGuGional invesGors in home morGgages who were naïve enough Go believe GhaG lending Go less-Ghan- quali ed borrowers was noG an unaccepGable risk. And Ghese bankers were cerGain GhaG Ghey could nd borrowers who could make aG leasG enough paymenGs Go allow Ghem Go resell Ghe new morGgages. Li9e was good. By Ghe summer o9 2007, however, Ghe consequences o9 Ghis unsusGainable demand on Ghe crediG markeGs sGarGed Go Gake iGs Goll. As Ghe Fed gradually resGored inGeresG raGes Go more normal spreads above Ghe raGe o9 in aGion, housing values sGalled. AG Ghe same Gime iG became increasingly apparenG GhaG hundreds o9 Ghousands o9 individuals had been granGed morGgages wiGh litle or no capaciGy Go repay Ghem. Con9ronGed wiGh a growing crisis noG only in real esGaGe buG in banking as well, Ghe Fed began a series o9 dramaGic raGe cuGs in laGe 2007. No more help from the Fed! Perhaps Ghe mosG Groubling diference beGween Ghe currenG downGurn and iGs posG-World War II counGerparGs is GhaG Ghe Federal Reserve over Ghe pasG 15 monGhs has used up virGu- ally all o9 iGs leverage Go bring abouG an economic recovery 4and yeG Ghe recession seems Go have only sGarGed Go gain momenGum. Te mid-December 2008 cuG in Ghe 9ederal 9unds raGe Go zero leaves Ghe Federal Reserve wiGh no more bulleGs in Ghe chamber 4aG leasG as 9ar as Ghe cenGral bank 9s main Gool, inGeresG raGe policy, is concerned. 10 W%a/ ar" /%" curr"n/ (&m&/s +n U.S. b+rr+w&ng? | www.am"r&canpr+gr"ss.+rg 9 Te consequences could be devasGaGing i9 recenG economic hisGory is any guide. Te NaGional Bureau o9 Economic Research idenGi es Gen periods o9 economic decline since 1950. Among Ghe more serious o9 Ghose were recessions idenGi ed by NBER as beginning in 1953, 1957, 1981, and 1990. All o9 Ghese downGurns were largely Ghe resulG o9 Ghe Federal Reserve deliberaGely slowing economic expansion by limiGing Ghe availabiliGy o9 crediG. In each o9 Ghese prior recessions, economic expansion was resGored once Ghe Fed relaxed Ghe supply o9 money and allowed inGeresG raGes Go 9all. 11 Te recession GhaG began in 1973 is one o9 Ghe clearesG examples. Early in 1973 Ghe Fed began Go worry GhaG Ghe economy was expanding aG Goo rapid a pace. EmploymenG had been expanding aG a raGe o9 3 percenG a year and Ghe level o9 unemploymenG had dropped below 5 percenG. Beginning in January GhaG year, sGeady increases were imposed in Ghe 9ederal 9unds raGe, li\x4ing iG 9rom 5.75 percenG in January Go 11 percenG in AugusG. In aGion concerns were 9urGher heighGened by Ghe Arab oil embargo, which occurred in OcGober 1973 and resulGed in Ghe Fed evenGually raising Ghe 9ederal 9unds raGe Go 13 percenG by Ghe 9ollowing summer. 12 Te resulG o9 Ghese shi\x4s in moneGary policy was a drop in GDP 9rom 5 percenG real growGh (a\x4er accounGing 9or in aGion) in 1973 Go a minus 0.5 percenG in 1974. GrowGh remained aG in 1975 as Ghe Fed began a gradual reducGion in raGes. By April 1976 Ghe Fed had cuG raGes Go 4.75 percenG and economy came back sGrongly wiGh 5 percenG growGh. Simply because Ghese downGurns were Ghe resulG o9 deliberaGe policymaking does noG mean GhaG Ghey were noG pain9ul. Four million people losG Gheir jobs beGween laGe 1973 and mid-1975, pushing unemploymenG Go 9.0 percenG. Tere was heaGed debaGe aG Ghe Gime wheGher GighG money was good medicine, buG iG was aG leasG somewhaG reassuring Go all GhaG Ghe downGurn could be reversed when a consensus 9ormed GhaG joblessness was a bigger problem Ghan rising prices. While Congress atempGed Go so\x4en Ghe impacG on Ghe unemployed during Ghese periods, Ghere was no real impeGus 9or serious scal sGimulus. IG would have simply been a case o9 Ghe governmenG ghGing wiGh iGsel9 over Ghe direcGion o9 Ghe economy. 13 During Ghe oGher previous downGurns Ghe Fed displayed similarly signi canG laGiGude 9or resGoring economic growGh. During Ghe 1981 recession Ghe 9ederal 9unds raGe was cuG 9rom Ghe 20-percenG levels iG had reached shorGly be9ore Ghe beginning o9 Ghe recession in July o9 GhaG year Go under 10 percenG by Ghe middle o9 Ghe 9ollowing year. During Ghe 1990 reces- sion Ghe 9ederal 9unds raGe 9ell 9rom 8 percenG aG Ghe ouGseG o9 Ghe downGurn Go 3 percenG by Ghe 9all o9 1992. 14 Te 2001 recession was somewhaG diferenG in GhaG raGes were only aG 5.5 percenG as Ghe business cycle peaked in March o9 2001. BuG Ghe economy was already well inGo recovery when Ghe Fed made iGs lasG raGe cuG Go 1 percenG in June o9 2003. 15 10 C"n/"r #+r Am"r&can Pr+gr"ss | Pump&ng l&#" Back &n/+ /%" U.S. ec+n+my Te currenG crisis is quiGe diferenG. Te Federal Reserve began slashing Ghe 9ederal 9unds raGe a year ago lasG SepGember 4Ghree monGhs be9ore Ghe o\x3cial beginning o9 Ghe cur- renG recession. IG was cuG 9rom 5.25 percenG in SepGember 2007 Go 2.0 percenG in April o9 2008, and Go 1.0 percenG Ghis pasG OcGober and Ghen 0.5 percenG in mid-December. Now, as more and more layof noGices are announced, Ghe Federal Reserve has Ghe naGion 9s moneGary policy pedal Go Ghe meGal and so 9ar Ghe counGry is sGill rolling backwards. Federal Reserve Chairman Ben Bernanke is looking 9or new and innovaGive moneGary inGervenGions Go ease crediG consGricGions, buG iG is clear GhaG Ghe bulk o9 Ghe li\x4ing will now be le\x4 Go Gax and spending policy. 16 The financial crisis has only recently started to affect the real economy Economic downGurns are characGerized by a downward spiral as disrupGions in one seg- menG o9 Ghe economy spread Go oGher segmenGs. Te impacG on Ghe broader economy causes a second wave o9 problems in Ghe segmenG where Ghe downGurn originaGed and Ghe process o9 deGerioraGion conGinues Go drive economic acGiviGy 9urGher downward. Te problem GhaG began in our overexGended housing markeG has caused exGraordinary damage Go Ghe nancial secGor. TaG in Gurn has resGricGed Ghe availabiliGy o9 lending, which has driven real esGaGe prices even lower, increased 9oreclosures, and placed 9urGher sGress on nancial insGiGuGions. TaG process conGinued 9or nearly a year be9ore iG began Go seri- ously in9ecG oGher secGors o9 Ghe economy beginning in early 2008. Now, nearly a year laGer, Ghe economy is in much worse shape. Forbes magazine, which Gracks layof noGices, idenGi ed 65 announcemenGs made by Ghe naGion 9s 500 largesG com- panies beGween November 1 and December 19, 2008, reporGing plans 9or 9uGure payroll reducGions GoGaling 197,000 jobs. BuG Ghe mosG disGurbing aspecG o9 Ghese reporGs is GhaG 9ar more noGices and job reducGions were announced in Ghe rsG Ghree weeks o9 December Ghan in Ghe enGire monGh o9 November. Te number o9 noGices per week in November was 4.75, buG in Ghe rsG Ghree weeks o9 December GhaG number more Ghan Gripled Go 15.3 per week. 17 Job losses jumped 9rom 18,000 per week in November Go 42,000 per week in December. Perhaps equally Gelling were Ghe indusGries afecGed. Nearly 9our in ve job-loss announce- menGs in November were in Ghe banking and nancial services secGors. By December Ghe layofs had spread Go oGher segmenGs o9 Ghe economy, wiGh banking and nancial services represenGing only slighGly more Ghan 2 in 5 jobs losG. IndusGries represenGed in Ghe early December daGa GhaG did noG appear in November included so\x4ware, 9ood processing, capi- Gal goods, and chemicals. 18 0ypical among Ghem was Ghis December 8 announcemenG by DuPonG Chemical as reporGed in Te Wall S9ree9 Journal . Te announcemenG was o9 parGicular noGe because chemicals are o\x4en viewed as a bellweGher 9or Ghe broader economy: W%a/ ar" /%" curr"n/ (&m&/s +n U.S. b+rr+w&ng? | www.am"r&canpr+gr"ss.+rg 11 DuPon9 Co. said Tursday i9 is cuting 9housands o+ jobs and slashed i9s 2008 earnings +orecas9 as 9he global economic down9urn shrinks orders +or i9s produc9s. Te chemical manu+ac9urer said i9 experienced ca sharp down9urn in demand d in 9he +our9h quar9er due 9o an accelera9ing decline in indus9rial produc9ion and collapsing consumer spending. In response, 9he company is embarking on a broad cos9-cuting e\x4or9 9ha9 i9 expec9s will boos9 i9s cash fow and earnings. DuPon9 said i9 will cu9 2,500 jobs, or abou9 4 percen9 o+ i9s work +orce, mainly a9 si9es 9ha9 make produc9s +or 9he au9o and housing marke9s in 9he U.S. and Wes9ern Europe. Te company is also dismissing 4,000 con9rac9ors and 9emporarily hal9ing produc9ion a9 100 plan9s. Te plan also includes a 10 percen9 9o 20 percen9 reduc9ion in capi9al spend- ing and cuting cos9s by $600 million nex9 year. Te company expec9s i9s e\x4or9s 9o resul9 in savings o+ $730 million and increase earnings by $130 million in 2009. cWe mus9 ge9 our cos9s and cash in line wi9h curren9 reali9y, d said DuPon9 Chairman and Chie+ Execu9ive Charles O. Holliday Jr. 19 All indicaGions are GhaG we are only in Ghe beginning phases o9 such announcemenGs. As corporaGe losses mounG and Ghe incomes o9 millions o9 9amilies begin Go dwindle, Ghe consequence 9or housing and nancial insGiGuGions is clear. Job losers who have been in good sGanding on Gheir morGgages may nd iG impossible Go make paymenGs. FurGher 9ore- closures will drive home prices lower. Banks and nancial insGiGuGions will be 9aced wiGh greaGer problems 9rom noG only Ghe morGgage side o9 Gheir businesses buG 9rom car loans and crediG cards as well. As producers shave payrolls Ghey will lose more cusGomers, and as Ghey lose cusGomers Ghey will conGinue Go shave payrolls. AG Ghe same Gime, more and more households will begin inGensively saving and avoiding all unnecessary purchases in 9ear GhaG Gheir bread winner(s) may aG some poinG lose Gheir jobs, and as Ghey save more and consume less Ghe prospecG GhaG Ghose jobs will be losG increases. How 9ar Ghis cycle conGinues is a mater o9 psychology as much as econmics. 12 C"n/"r #+r Am"r&can Pr+gr"ss | Pump&ng l&#" Back &n/+ /%" U.S. ec+n+my November-December layoff announcements by 500 largest U.S. companies Layoffs during all of November Layoffs during first 3 weeks of December Date Company Total laid off Industry Date Company Total laid off Industry 11/4/2008 Hart:ord Financial Services Group 500 Finance 12/1/2008 JPMorgan Chase 9,200 Banking 11/6/2008 Mattel 1,000 Household 12/1/2008 PepsiCo 87 Food 11/6/2008 MGM Mirage 400 Leisure 12/2/2008 United States Steel 4,175 Materials 11/6/2008 Omnicom Group 145 Media 12/3/2008 United Technologies 350 Conglomerates 11/7/2008 Ford Motor 2,600 Durables 12/3/2008 Je\x3eries Group 300 Financials 11/11/2008 AK Steel Holding 800 Materials 12/3/2008 Gannett 2,000 Media 11/12/2008 Textron 665 Conglomerates 12/3/2008 Viacom 850 Media 11/12/2008 Morgan Stanley 2,000 Finance 12/3/2008 Adobe Systems 600 So:tware 11/12/2008 Liberty Media 910 Retailing 12/3/2008 Freeport-McMoRan Copper & Gold 1200 Materials 11/12/2008 Applied Materials 1,800 Technology 12/4/2008 E.I. du Pont de Nemours 2,500 Chemicals 11/14/2008 Sun Microsystems 6,000 Technology 12/4/2008 General Electric 500 Conglomerates 11/17/2008 Citigroup 52,000 Banking 12/4/2008 Steel Dynamics 65 Materials 11/20/2008 Boeing 800 Aerospace 12/4/2008 Windstream 170 Telecom 11/20/2008 Bank o: New York Mellon 1,800 Banking 12/4/2008 AT&T 12,000 Telecom 11/21/2008 Western Union 200 Business Serv 12/5/2008 Cummins 500 Capital Goods 11/21/2008 Berkshire Hathaway 215 Finance 12/5/2008 General Motors 7,758 Durables 11/21/2008 International Paper 550 Materials 12/5/2008 Legg Mason 200 Financials 11/24/2008 BlackRock 10 Financials 12/5/2008 Cablevision 100 Media 11/25/2008 Dana Holding 50 Durables 12/5/2008 Staples 140 Retailing Full Month Total 72,445 12/8/2008 Dow Chemical 5,000 Chemicals 12/8/2008 3M 2,300 Conglomerates 12/8/2008 Anheuser-Busch 1,400 Food 12/8/2008 Wyndham Worldwide 4,000 Leisure 12/9/2008 Praxair 1,600 Chemicals 12/10/2008 Mohawk Industries 105 Durables 12/10/2008 Procter & Gamble 320 Household 12/11/2008 Whirlpool 250 Durables 12/11/2008 Bank o: America 35,000 Banking 12/12/2008 Las Vegas Sands 11,216 Leisure 12/12/2008 Masco 500 Construction 12/12/2008 International Paper 2,050 Materials 12/13/2008 Berkshire Hathaway 345 Finance 12/15/2008 Merrill Lynch 400 Financials 12/15/2008 Charles Schwab 100 Financials 12/16/2008 CBS 30 Media 12/17/2008 Ryder System 3,100 Services 12/17/2008 Western Digital 2,500 Technology 12/17/2008 Aetna 1,000 Health Care 12/17/2008 Parker-Hanni n 46 Capital Goods 12/17/2008 Bristol-Myers Squibb 3,700 Pharmaceuticals 12/18/2008 Caterpillar 814 Capital Goods 12/18/2008 Omnicom Group 3,145 Media 12/19/2008 Genworth Financial 1,000 Insurance 12/19/2008 Eaton 87 Capital Goods 12/19/2008 Electronic Arts 1,000 So:tware 12/19/2008 Sovereign Bancorp 1,000 Banking 3 Week Total 124,703 Source: Klaus Kneale, Layo Tracker, Forbes Magazine , available at http://www.(orbes.com/leadership/2008/11/17/layo -tracker-unemployement-lead-cx_kk_1118tracker.html. M"/r&cs +# g+v"rnm"n/ s/&mu(us | www.am"r&canpr+gr"ss.+rg 13 Metrics of government stimulus JusG as priming a waGer pump lls Ghe gap beGween Ghe pump and Ghe underground waGer supply, economic pump priming lls Ghe gap beGween an economy 9s declining demand 9or goods and services and iGs capaciGy Go produce Ghem. Demand is generaGed by 9our broad componenGs o9 Ghe economy: consumer purchases; invesGmenG by businesses; governmenG expendiGures (9ederal sGaGe and local); and neG exporGs. Consumer purchases accounG 9or abouG 70 percenG o9 GoGal demand while business invesG- menG accounGs 9or abouG 14 percenG. VirGually all indicaGions are GhaG boGh are sinking rapidly. cTe conGracGion in spending during Ghe currenG downGurn is likely Go prove more severe Ghan in any downGurn since Ghe GreaG Depression, d according Go Bruce Kasman, Ghe chie9 economisG aG JPMorgan Chase & Co. 20 A major componenG o9 consumer demand is reGail sales. November 2008 was Ghe \x4h sGraighG monGh GhaG reGail sales in Ghe UnGied SGaGes declined. November sales were 7.4 percenG below Ghe level o9 sales lasG November, and mosG 9orecasGers expecG a much sharper decline in overall consumer demand 9ollow- ing Ghe holidays. 21 AG Ghe same Gime, businesses are noG only shedding workers Go save cash buG cuting back on planned invesGmenGs, Goo. Already many 9orecasGers expecG Ghe decline in consumer purchasing and business invesG- menGs Go equal beGween 8 percenG and 10 percenG o9 GDP by Ghe laGer parG o9 2009, wiGh concerns GhaG Ghose Ghe numbers could geG worse a\x4er GhaG. (Goldman Sachs was projecG- ing 9.1 percenG even be9ore Ghe November employmenG reporG). Such a decline would o9 course cause 9urGher deGerioraGion in employmenG, purchasing power, and business solvency. 0o ofseG GhaG drag, Ghe 9ederal governmenG would need Go generaGe demand equal Go abouG $1.3 Grillion Go $1.5 Grillion. 22 The premium for increasing confidence IG is noG necessary, however, 9or Ghe size o9 a sGimulus package Go equal Ghe expecGed decline in demand i9 governmenG Gakes decisive acGion GhaG increases Ghe con dence o9 consumers and business. Some believe GhaG a quarGer Go a Ghird o9 Ghe decline would noG occur i9 a credible plan is in place soon enough. In oGher words, a sGrong package may have Go generaGe only abouG $1.0 Grillion o9 Ghe $1.3 Grillion Go $1.5 Grillion expecGed shorG9all. 14 C"n/"r #+r Am"r&can Pr+gr"ss | Pump&ng l&#" Back &n/+ /%" U.S. ec+n+my Secondly, aG leasG a porGion o9 Ghe money wiGhin a sGimulus package may be spenG more Ghan once during Ghe course o9 Ghe year. I9 Ghe governmenG, 9or insGance, increases expen- diGures Go hire a worker Go repair a school, GhaG worker will spend a porGion o9 his or her earnings Go buy 9ood, make house or renG paymenGs, and purchase oGher iGems GhaG will creaGe addiGional jobs. EconomisGs call Ghis Ghe mulGiplier efecG. How large GhaG efecG is and how much spe- ci c Gypes o9 spending or Gax cuGs conGribuGe Go iG has long been a mater o9 sGrenuous disagreemenG among Ghose who sGudy Ghe issue. Generally speaking, economisGs have lowered Gheir esGimaGe o9 Ghe size o9 Ghe mulGiplier in Ghe U.S. economy 9or any Gype o9 economic acGiviGy due in parG Go globalizaGion 4Ghe likelihood GhaG a signi canG porGion o9 any increase in income will be spenG on 9oreign-made producGs. As Ghe raGe o9 savings increases Ghe size o9 Ghe mulGiplier also goes down. While some argued in years pasG GhaG expendiGures mighG generaGe economic acGiviGy amounGing Go 9our Gimes Ghe size o9 Ghe iniGial governmenG expendiGure, 9ew people now believe GhaG Ghe correcG mulGiplier 9or governmenG expendiGures in general is less Ghan Gwo. ImporGanGly, boGh expendiGures and Gax cuGs sGimulaGe Ghe economy, Ghough expendiGures sGimulaGe more acGiviGy because Ghey have a higher mulGiplier efecG Ghan Gax cuGs, and some caGegories o9 spending are likely Go have a higher mulGiplier Ghan oGhers. Similarly, some Gax breaks are likely Go sGimulaGe more acGiviGy or have a higher mulGiplier Ghan oGhers. Tese consideraGions are imporGanG Go anyone designing an economic sGimulus package who wanGs Go reach a speci c level o9 sGimulus while reducing Go a minimum Ghe size o9 Ghe overall spending package. A recenG analysis o9 sGimulus proposals by Ghe economic 9orecasGing uniG aG Goldman Sachs argued GhaG a sGimulus package conGaining only Gax cuGs would have Go be 50 percenG larger Ghan a sGimulus package made up o9 spending iGems. In oGher words, $900 billion in Gax cuGs would provide no more sGimulus Ghan $600 billion in spending ouGlays. 23 Tis is because, in Goldman Sachs 9s view, a large porGion o9 Gax cuGs such as Ghose provided in Ghe sGimulus package adopGed earlier in 2008, wenG direcGly Go savings or debG reducGion or Go purchase imporGed goods. When Ghe governmenG gives Gax breaks o9 a 9ew hundred dollars Go individuals who have yeG Go be afecGed by job losses, Ghen iG is likely GhaG a large porGion will go Go paying down crediG card debG, increasing personal savings, or purchase o9 9oreign- made producGs, in which case Ghere is litle addiGional boosG Go Ghe U.S. economy. Slow spending One o9 Ghe mosG inGracGable and leasG appreciaGed problems in using governmenG spend- ing as a 9orm o9 economic sGimulus is Ghe slow pace aG which 9unds are expended under many worGhwhile governmenG programs. IG is noG enough 9or Congress Go appropriaGe M"/r&cs +# g+v"rnm"n/ s/&mu(us | www.am"r&canpr+gr"ss.+rg 15 Ghe money and Ghe presidenG Go sign Ghe spending inGo law. No jobs are creaGed unGil Ghe money is apporGioned Go Ghe appropriaGe agency, plans 9or Ghe expendiGure are nalized, a conGracG or granG award is made, and Ghe conGracGor begins work and sGarGs submiting vouchers 9or expendiGures. Tis can happen raGher quickly or require an exGraordinary amounG o9 Gime depending on Ghe program and Ghe manner in which iG is adminisGered. I9 a decision is made Go provide 9ederal economic relie9 Go prevenG layofs in sGaGe and local governmenGs, Ghen Ghose expendiGures will Gake place almosG immediaGely. BuG i9 Ghe govern- menG decides Go replace a bridge, iG can Gake a greaG deal o9 Gime Go design Ghe bridge, per9orm communiGy and environmenGal impacG sGudies, and Ghen monGhs more Go selecG a conGracGor. Once Ghose sGeps are compleGe Ghe acGual consGrucGion phase will Gake several years. Te Congressional BudgeG O\x3ce and Ghe WhiGe House O\x3ce o9 ManagemenG and BudgeG are boGh charged wiGh making regular esGimaGes as Go how quickly money conGained in appropriaGion bills will be spenG. Te cspend ouG d esGimaGes provided by Ghe Congressional BudgeG O\x3ce 9or speci c acGiviGies 9unded in Ghe Job CreaGion and UnemploymenG Relie9 AcG o9 2008, H.R. 7110 4Ghe economic sGimulus package GhaG Congress atempGed Go geG Ghe Bush adminisGraGion Go accepG lasG SepGember 4are insGrucGive in undersGanding how Ghe make up o9 a spending package can signi canGly alGer Ghe amounG o9 sGimulus provided wiGhin a speci c Gime period. H.R. 7110 conGained $2.6 billion in increased 9unds 9or Ghe Food SGamp program. CBO esGimaGed GhaG all o9 GhaG money would be spenG during scal year 2009, which began lasG OcGober 1. A similar patern o9 expendiGure was Grue 9or a proposal Go help sGaGes by Gem- porarily increasing Ghe share o9 Medicaid cosGs covered by Ghe 9ederal governmenG. 24 BuG 9or oGher iGems in Ghe bill, Ghe raGe o9 spending was much slower. Te deGerioraGion o9 sewer and waGer sysGems is raGed as one o9 Ghe mosG pressing in9rasGrucGure problems 9acing Ghe naGion by Ghe American SocieGy o9 Civil Engineers. IG is undersGandable GhaG Congress would wanG Go Gry Go address GhaG problem as parG o9 any job-creaGing package. BuG Ghe near-Germ economic impacG o9 such an eforG is remarkably small. 25 CBO esGimaGes GhaG o9 Ghe $7.5 billion Congress proposed Go spend, only $0.3 billion, or 4 percenG, would acGually creaGe jobs in Ghe rsG scal year. During Ghe second scal year only $1.5 billion, or 20 percenG, would be spenG. FurGhermore, according Go CBO $2.5 billion, or more Ghan a Ghird, o9 Ghe ouGlays 9rom Ghis appropriaGion would occur a\x4er scal year 2012. 26 Spending 9or highway projecGs was also problemaGic in H.R. 7110. While CBO Gook inGo consideraGion GhaG Congress was limiGing Ghe appropriaGion Go only Ghose highway projecGs wiGh approved conGracGs 9rom sGaGe deparGmenGs o9 GransporGaGion, Ghe rsG year spend ouG o9 Ghe $12.8 billion proposed by Congress was only $4 billion, or 32 percenG. MosG o9 Ghe remainder, $5.8 billion, was expended in Ghe 9ollowing year, buG 23 percenG o9 Ghe 9unds would noG acGually ow Go conGracGors unGil Ghe 9ollow Ghree scal years. 27 16 C"n/"r #+r Am"r&can Pr+gr"ss | Pump&ng l&#" Back &n/+ /%" U.S. ec+n+my Te incoming 111Gh Congress is now looking aG sending a sGimulus package Go Ghe PresidenG in January insGead o9 SepGember, which means Ghe CBO assumpGions aG Ghe Gime o9 Ghis budgeG scoring 9or H.R. 7110 on many o9 Ghese ouGlays would slip 9urGher inGo 9uGure years, and GhaG close Go hal9 o9 Ghe 9unds appropriaGed 9or such highway projecGs would sGill be in Ghe U.S. 0reasury when Ghe nexG Congress convenes Gwo years 9rom Ghis January. Tere are sGrong argumenGs 9or making Ghese Gypes o9 invesGmenGs, and Ghere is no doubG GhaG Ghey will provide greaGer bene Gs in Ghe long Germ Ghan some proposed spending iGems GhaG will creaGe jobs more rapidly. IG is also Grue GhaG we are probably in 9or an exGended recession and a lengGhy recovery. BuG GhaG does noG change Ghe simple maGhemaG- ics we con9ronG in dealing wiGh Ghe currenG crisis 4Ghe need 9or large sums o9 money Go ow inGo Ghe economy almosG immediaGely. 0o Ghe exGenG GhaG long-Germ invesGmenGs are included in any package Ghey should noG be measured as sGimulus based on Ghe GoGal appropriaGed buG raGher on Ghe cspend ouG d during Ghe period o9 Gime GhaG Ghe sGimulus is required. Teir inclusion will require Ghe overall size o9 Ghe package Go be larger. And Ghey will elevaGe governmenG ouGlays well inGo Ghe 9uGure when good policy will dicGaGe GhaG we should be Grying Go Grim de ciGs and resGore scal balnce. M"/r&cs +# g+v"rnm"n/ s/&mu(us | www.am"r&canpr+gr"ss.+rg 17 CBO scoring of spending rates in H.R. 7110 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Clean water Budget authority 7,500 0 0 0 0 0 0 0 0 0 Estimated outlays 300 1,520 2,250 870 490 170 98 49 32 20 4.0% 20.3% 30.0% 11.6% 6.5% 2.3% 1.3% 0.7% 0.4% 0.3% Highway construction Budget authority 12,800 0 0 0 0 0 0 0 0 0 Estimated outlays 4,096 5,760 1,536 1,152 256 0 0 0 0 0 32.0% 45.0% 12.0% 9.0% 2.0% 0.0% 0.0% 0.0% 0.0% 0.0% Flood control and other water resources Budget authority 5,300 0 0 0 0 0 0 0 0 0 Estimated outlays 2,715 1,375 370 265 175 75 0 0 0 0 51.2% 25.9% 7.0% 5.0% 3.3% 1.4% 0.0% 0.0% 0.0% 0.0% Other in:rastructure Budget authority 5,600 0 0 0 0 0 0 0 0 0 Estimated outlays 1,095 1,937 1,320 910 300 38 0 0 0 0 19.6% 34.6% 23.6% 16.3% 5.4% 0.7% 0.0% 0.0% 0.0% 0.0% Subtotal Budget authority 36,900 0 0 0 0 0 0 0 0 0 Estimated outlays 9,855 12,294 6,604 4,418 1,221 283 98 49 32 20 26.7% 33.3% 17.9% 12.0% 3.3% 0.8% 0.3% 0.1% 0.1% 0.1% Unemployment compensation and job training Budget authority 6,490 0 0 0 0 0 0 0 0 0 Estimated outlays 6,115 250 125 0 0 0 0 0 0 0 94.2% 3.9% 1.9% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Temporary increase in Medicaid matching rate Budget authority 12,190 2,475 5 5 5 5 5 5 5 5 Estimated outlays 12,190 2,475 5 5 5 5 5 5 5 5 100.0% 20.3% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Temporary increase in :ood assistance (Food Stampts) Budget authority 2,623 30 5 5 0 0 0 0 0 0 Estimated outlays 2,623 30 5 5 0 0 0 0 0 0 100.0% 1.1% 0.2% 0.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Total Budget authority 58,203 2,505 10 10 5 5 5 5 5 5 Estimated outlays 30,783 15,049 6,739 4,428 1,226 288 103 54 37 25 52.9% 25.9% 11.6% 7.6% 2.1% 0.5% 0.2% 0.1% 0.1% 0.0% Source: Congressional Budget Ofce, cEstimated Cost o( H.R. 7110, The Job Creation and Unemployment Relie( Act o( 2008, as Intro duced on September 26, 2008, d available at http://cbo.gov/(tpdocs/98xx/doc9816/hr7110.pd(. 18 C"n/"r #+r Am"r&can Pr+gr"ss | Pump&ng l&#" Back &n/+ /%" U.S. ec+n+my Designing the stimulus package RecenGly economisGs have begun Go use Ghe Germ cuncharGed GerriGory d Go describe Ghe currenG condiGion o9 Ghe economy. TaG is perhaps anoGher way o9 saying GhaG economeGric models and oGher Gypes o9 9orecasGs can be expecGed Go be even less reliable Ghan normal. WhaG we do know is GhaG nearly all 9orecasGers have been overly opGimisGic abouG Ghe 9uGure course o9 Ghe economy over Ghe pasG year and have been 9orced repeaGedly Go make downward revisions in Gheir projecGions. AccuraGe 9orecasGing requires predicGions abouG human behavior 4educaGed guesses GhaG in Ghe currenG environmenG require predicGing how people will behave in siGuaGions GhaG Ghey have noG previously 9aced. How much will households cuG back on spending given Ghe drumbeaG o9 news abouG layofs and business 9ailures? How close Go Ghe bone will business execuGives cuG Gheir capiGal spending and work 9orce? Tese are quesGions GhaG psychologisGs may be beter prepared Go answer Ghan economisGs. Even issues GhaG can normally be predicGed based on simple maGh exGrapolaGions have proven problemaGic. 0ake, 9or insGance, Ghe conjecGure over Ghe November employmenG reporG. Tis can normally be esGimaGed wiGh some degree o9 accuracy using Ghe number o9 new claims 9or unemploymenG bene Gs during Ghe week in which Ghe Labor DeparGmenG survey is conducGed. Te consensus 9orecasG was 9or a loss o9 300,000 jobs. Te mosG pes- simisGic among Ghe major 9orecasGers predicGed a decline o9 350,000 jobs. 28 Te Labor DeparGmenG, however, reporGed Ghe loss o9 533,000 jobs or 78 percenG above Ghe consensus. 29 IG would be as reckless o9 economic policymakers noG Go consider Ghe prospecG GhaG Ghe economic decline may be worse Ghan 9orecasG as iG would be 9or a mili- Gary commander Go 9ail Go weigh Ghe possibiliGy GhaG an adversary may prove Go be more resource9ul and efecGive on Ghe batle eld Ghan his inGelligence advisors predicG. Te Goldman Sachs 9orecasG GhaG spending 9or personal consumpGion and business invesG- menG may decline by Ghe laGer parG o9 2009 by an annual raGe o9 more Ghan 9 percenG 4 indicaGing a gap beGween projecGed consumpGion and capaciGy o9 abouG $1.3 Grillion 4is a reasonable place Go sGarG. One mighG reasonably exGrapolaGe GhaG we are headed Goward a period by Ghe laGer parG o9 2009 in which demand will be somewhere beGween $1.1 Grillion and $1.5 Grillion below Ghe level needed Go resGore growGh. D"s&gn&ng /%" s/&mu(us packag" | www.am"r&canpr+gr"ss.+rg 19 I9 Ghe more pessimisGic end o9 Ghe range is used 9or planning purposes, and i9 we also assume GhaG as much as a Ghird o9 GhaG decline can be avoided i9 consumers and businesses believe GhaG governmenG is inGervening wiGh su\x3cienG 9orce Go reverse Ghe direcGion o9 Ghe recession, Ghen an economic sGimulus o9 $1 Grillion is necessary. Te amounG o9 spending increases and Gax cuGs necessary Go provide GhaG level o9 sGimulus, however, could be less depending on how Ghe package is sGrucGured. Assuming GhaG spending could leverage 1.75 Gimes Ghe amounG o9 economic acGiviGy as Ghe sums appropriaGed, and 9urGher assuming GhaG Gax cuGs could leverage 1.2 Gimes Ghe acGiviGy o9 Ghe amounG o9 revenue loss Ghey would generaGe, Ghen a package o9 $400 billion in spending increases and $250 billion in Gax cuGs would achieve Ghe goal. TaG level o9 spending and Gax cuGs, however, does noG deal wiGh several problems. FirsG Ghe 9ederal governmenG may noG be able Go efecGively disperse or manage GhaG much addi- Gional spending in a one-year Gime period. I9 Ghis proves Go be Ghe case, Ghen Ghe overall size o9 Ghe package and Ghe de ciG Go be incurred would increase. I9 only $300 billion in addiGional sGimulus could be managed on Ghe spending side, Ghen Gax cuGs o9 $400 billion would be required Go reach Ghe sGimulus goal 4driving Ghe 9ederal budgeG de ciG $50 bil- lion higher, Go abouG $700 billion. Secondly, some invesGmenG programs GhaG may help Ghe economy 9or many years inGo Ghe 9uGure provide only a porGion o9 Gheir spending during Ghe period in which sGimulus will be needed. 0o Ghe exGenG Ghose programs make up a major parG o9 Ghe package Ghe amounGs appropriaGed will have Go be larger. I9, 9or insGance, in9rasGrucGure spending o9 $100 billion were included in Ghe package and Ghe mix o9 in9rasGrucGure programs were expecGed Go spend 30 percenG o9 Ghe sums appropriaGed wiGhin Ghe rsG 12 monGhs a\x4er enacGmenG, Ghen an addiGional $70 billion in 9asG spending programs would need Go be added Go Ghe package Go meeG Ghe sGimulus goal. Te righG mixGure o9 Gaxes and spending proposals is a poliGical as well as policy decision. I9 Ghere is noG supporG 9or a package o9 more Ghan $650 billion in new spending and Gax cuGs, Ghen iG should be weighGed heavily Go Ghe spending side 4and GhaG spending should be almosG exclusively on programs GhaG have a rapid spend ouG. I9 Ghere is a sGrong enough desire Go see longer-Germ invesGmenGs play a signi canG role in sGimulus eforGs Go permiG an increase in Ghe size o9 Ghe amounGs appropriaGed, Ghen such measures should be included. Te botom line is GhaG a speci c amounG o9 money needs Go ow inGo Ghe economy wiGhin a speci c Gime period ($650 billion under Ghis analysis) and GhaG amounG should noG be compromised in order Go meeG oGher policy objecGives. We are noG in a siGuaGion GhaG granGs us GhaG luxury. Some o9 Ghe packages GhaG have been discussed are proposed on a Gwo-year basis. IG is real- isGic Go recognize GhaG much o9 Ghe money GhaG will become available in a sGimulus package cra\x4ed in January 2009 will be spenG in scal year 2010 (beginning nexG OcGober), and GhaG a porGion o9 iG will sGill be available in Ghe 9ollowing year. BuG Ghe $650 billion package 20 C"n/"r #+r Am"r&can Pr+gr"ss | Pump&ng l&#" Back &n/+ /%" U.S. ec+n+my proposed here would be 9or only Ghe rsG round o9 sGimulus. Tere is a sGrong likelihood GhaG addiGional sGimulus will be required in 2010, buG we can noG aG Ghis poinG responsibly predicG how large GhaG sum will be or which segmenGs o9 Ghe economy will be in greaG- esG need o9 9urGher relie9. IG is unlikely, however, GhaG Ghe economy would gain enough sGrengGh over Ghe course o9 Ghe nexG 12 monGhs Go permiG Ghe governmenG Go reduce Ghe sGimulus iG provides by more Ghan 50 percenG. Finally, iG should be undersGood GhaG Ghe amounG o9 sGimulus we are Galking abouG is above Ghe levels o9 de ciG we are already incurring. I9 one assumes GhaG Ghe de ciG would be $900 billion wiGhouG a sGimulus Ghen Ghe package ouGlined above would push Ghe de ciG Go someGhing less Ghan $1.6 Grillion. Tis amounG cannoG be ofseG by spending cuGs or Gax increases. A spending increase o9 $300 billion 9or domesGic relie9 ofseG by a spending cuG o9 $300 billion in de9ense would yield virGually no sGimulus aG all. Te sGimulus comes 9rom Ghe 9ederal governmenG borrowing money when oGher segmenGs o9 Ghe economy are unable Go borrow and spending in ways Ghe creaGe jobs and resGore demand. t%" n"c"ss&/y +# ac/&+n | www.am"r&canpr+gr"ss.+rg 21 The necessity of action We are in a criGical period. Tis crisis is clearly much more dangerous Ghan any we have 9aced in our li9eGimes and Ghe possibiliGies 9or consequences more dire Ghan any o9 us would like Go consider are real. BuG we can greaGly reduce Ghose risks wiGh appropriaGe acGion o9 a magniGude GhaG squarely meeGs Ghe problem and resGores con dence in Ghe pro- cess. Overwhelming 9orce is a good sGraGegy noG only on Ghe batle eld buG in economics as well. AG Ghis juncGure, overwhelming 9orce musG come 9rom Gax and spending policies 4 moneGary policy opGions are un9orGunaGely quiGe limiGed. While Ghe poliGical sysGem may have Grouble digesGing de ciGs o9 Ghe size GhaG are needed, one should recall Ghe early years o9 Ghe New Deal when de ciGs were consGrained Go roughly Ghe same levels as Ghose incurred in Ghe lasG Hoover years, and Ghe economy bumped along wiGh relaGively modesG improvemenG in unemploymenG and growGh Goo weak Go allow Ghe governmenG Go reGurn Go scal balance. UlGimaGely, Ghe public debG as a share o9 GDP more Ghan doubled in Ghe decade o9 Ghe 1930s, buG Goo litle was done in any one period Go bring abouG a real reversal. Had GhaG happened, a greaG deal o9 human sufering could have been avoided during Ghe GreaG Depression and Ghe public debG mighG have been lower as well. Finally, one lasG consideraGion GhaG should be weighed in deGermining Ghe appropriaGe size o9 an economic sGimulus package 4a consideraGion GhaG also relaGes Go Ghe experience o9 Ghe 1930s. GreaG economic problems Gend Go spawn oGher social and poliGical problems. High unemploymenG, poverGy, and privaGion creaGe social chaos and dramaGic and someGimes violenG poliGical change. Such reacGions in Ghe UniGed SGaGes are unlikely given Ghe resulGs o9 our naGional elecGions Ghis pasG November, buG how efecGively U.S. policymakers manage Ghe currenG crisis will have pro9ound efecGs on evenGs around Ghe world. Economic policies GhaG minimize economic damage will also reduce geopoliGical risks GhaG may ulGimaGely be equally imporGanG Go long-Germ economic recovery and prosperiGy here aG home. 22 C"n/"r #+r Am"r&can Pr+gr"ss | Pump&ng l&#" Back &n/+ /%" U.S. ec+n+my Endnotes 1 Gross domestic product data is this report is extracted :rom the Bureau o: Eco- nomic Analysis, Table 1.1.5 gross domestic product. All de cit data is :rom the Ofce o: Management and Budget, Historical Table 1.1, cSummary o: Receipts, Outlays, and Surpluses or De cits. d In order to express de cits as a percentage o: GDP, it was necessary to estimate GDP by scal year rather than calendar year. Because the GDP data prior to 1940 is available only by calendar year, scal year data was estimated by averaging the GDP :or the two calendar years in which the scal year occurred.. For example, the GDP :or scal year 1931 which extended :rom July 1, 1930 to June 30, 1931 was calculated by averaging the GDP :or calendat years 1930 and 1932. 2 Franklin D. Roosevelt, State o: the Union, January 3, 1938, available at http:// www.presidency.ucsb.edu/ws/index.php?pid=15517. 3 Bureau o: the Census, Historical Statistics o: the United States, cColonial Times to 1970, Part 2 Chapter U d (U.S. Department o: Commerce) available at http:// www2.census.gov/prod2/statcomp/documents/CT1970p2-08.pd:. 4 Central Intelligence Agency, cThe World Factbook 2008, d available at https:// www.cia.gov/library/publications/the-world-:actbook/. 5 Ron Suskind, The Price o 9 Loyalty: George W. Bush, the White House, and the Educa- tion o 9 Paul O 9Neill , Simon and Schuster Adult Publishing Group, January 20004, p. 291. 6 Paul Krugman, cRighting the Upside-Down Economy: Creating a Sustainable Recovery. d (Center :or American Progress event, 2004). 7 Scott Lilly, cCan Consumer Purchasing Power Sustain the Current Economic Recovery? d (Washington: Center :or American Progress, 2004). 8 Scott Lilly, cUnderstanding Bushonomics: How We Got Into This Mess in the First Place d (Washington: Center :or American Progress, 2008). 9 Ibid. 10 The Federal Reserve Bank o: New York, Historical Changes of the Target Federal Funds and Discount Rates , available at http://www.newyork:ed.org/markets/ statistics/dlyrates/:edrate.html. 11 Marc Labonte and Gail Makinen, The Current Economic Recession: How Long, How Deep, and How Diferent From the Past? Congressional Research Service, January 10, 2002, p. 27. 12 Ibid. 13 Ibid. 14 Ibid. 15 Ibid. 16 The Federal Reserve Bank o: New York, Historical Changes of the Target Federal Funds and Discount Rates , available at http://www.newyork:ed.org/markets/ statistics/dlyrates/:edrate.html. 17 Klaus Kneale, Layo\x3 Tracker, Forbes Magazine , available at http://www. :orbes.com/leadership/2008/11/17/layo\x3-tracker-unemployement-lead- cx_kk_1118tracker.html. 18 Ibid. 19 cDupont Projects Quarterly Loss, Unveils Restructuring Plan, d Wall Street Journal , December 4, 2008. 20 cU.S. spending, home sales expected to tumble in November. d Bloomberg , December 22, 2008. 21 U.S. Census Bureau News, cAdvance Monthly Sales :or Retail Trade and Food Services, d December 12, 2008 (Department o: Commerce), available at http:// www.census.gov/marts/www/marts_current.html. 22 Goldman Sachs, cGoldman Cuts Near-Term Forecast :or Real U.S. GDP, d November 9, 2008, available at http://www.bloomberg.com/apps/news?pid=conewsstory &re:er=conews&tkr=GS%3AUS&sid=aOgyEwURMmv0. 23 Ibid. 24 Congressional Budget Ofce, cEstimated Cost o: H.R. 7110, The Job Creation and Unemployment Relie: Act o: 2008, as Introduced on September 26, 2008, d available at http://cbo.gov/:tpdocs/98xx/doc9816/hr7110.pd:. 25 Ibid. 26 Ibid. 27 Ibid. 28 R. Mark Rogers, cIt 9s a recession and getting worse. d Barron 9s Econoday Simple Economics , December 5, 2008. 29 Bureau o: Labor Statistics, cThe Employment Situation: November 2008 d (U.S. Department o: Labor) available at http://www.bls.gov/news.release/ pd:/empsit.pd:. Ab+u/ /%" au/%+r | www.am"r&canpr+gr"ss.+rg 23 About the author Scot Lilly is a Senior Fellow aG American Progress who researches and wriGes abouG a wide range o9 areas including governance, 9ederal budgeGing, naGional securiGy, and Ghe economy. He joined Ghe CenGer in March 2004 a\x4er 31 years o9 service wiGh Ghe UniGed SGaGes Congress. He served as clerk and sGaf direcGor o9 Ghe House AppropriaGions Commitee, minoriGy sGaf direcGor o9 GhaG commitee, execuGive direcGor o9 Ghe House DemocraGic SGudy Group, execuGive direcGor o9 Ghe JoinG Economic Commitee and chie9 o9 sGaf in Ghe o\x3ce o9 Congressman David Obey. The Center :or American Progress is a nonpartisan research and educational institute dedicated to promoting a strong, just and :ree America that ensures opportunity :or all. We believe that Americans are bound together by a common commitment to these values and we aspire to ensure that our national policies re:lect these values. We work to :ind progressive and pragmatic solutions to signi:icant domestic and international problems and develop policy proposals that :oster a government that is co: the people, by the people, and :or the people. d 1333 H Street, NW, 10tH Floor, WaSHiNgtoN, DC 20005 " tel: 202-682-1611 " Fax: 202-682-1867 " WWW.ameriCaNprogreSS.org

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