Many economists are now calling for the US to embark in a massive “shock therapy” fiscal stimulus package to bring the US economy back to life (and save us from a severe recession). While I see their reasoning, and I appreciate their optimism, I am doubtful that the US has enough firepower or ability to slow this one down (on their own). Its only with a well coordinated global action that a fiscal stimulus would work.
The financial and economic crises are too big and too global for any one (national) local fiscal stimulus package to have much effect. If the US moves forward with plans to spend up to $700 billion in fiscal stimulus (building roads, bridges, and green investments), we may end up with many new roads and bridges, but its unlikely that this action alone will pull the US out of recession.
The government of the US can not spend nearly enough money to make a significant change in the over-powering deleveraging process that is working its way through the world of global finance. Perhaps even a coordinated attempt by many governments would not be enough to jolt this train (wreck) back on track.
Over the past few weeks, there has been alot of discussion about an upcoming fiscal stimulus package. President elect Obama has put much attention to this topic…then, yesterday, there was a lineup of Governors from across the US that came to Washington to pitch President elect Obama on the need for $176B in fiscal spending to jump start the economy. In addition, there is along line of industry leaders lining up with their hands out looking for help.
Conclusion: the US is clearly considering a fiscal stimulus package as the way out of this mess…but Im not so sure that this conclusion is correct.
Lack of Monetarist options:
I agree with the conclusion that traditional monetary policy remedies will not work. Not this time. In GloboTrends, I have previously stated that Monetary policy wont work during this particular crisis (to jump start the US economy) because of the malfunctioning credit markets. In this posting, Im going to cover why I believe that fiscal stimulus won’t work either, and why the US should not borrow vast amounts of money to do this.
Existing Fiscal stimulus has done nothing
First of all, I ask that readers consider the massive fiscal stimulus package that has already hit the consumers since July (2008)….What fiscal stimulus package you ask? The stunning recent fall in gasoline prices globally, of course! (this has been a MASSIVE economic stimulus package that has been launched globally, putting cash into consumers hands, and has boosted confidence, making people feel richer).
Falling gas prices = same as fiscal stimulus
This fall in gas prices must be one of the largest (and most welcome) fiscal stimulus package imaginable for struggling governments around the globe. They got the fiscal boost without having to raise taxes or pass any new laws. But the lesson of the gas-price fiscal stimulus is that people will save their money rather than spend it, and that consumers are less willing to spend new money than they have in the past.
While the gas-price fiscal stimulus may be small in comparison to the proposed $700bn bandied about by the new administration, its doubtful that the entire sum could be put to productive use immediately. Instead, what we are looking at is a mixture of road building, green projects and tax cuts. The infrastructure projects might put people to work, but the fiscal impact would be spread over months or even years. The tax cuts would be more immediate, but the new money would probably be saved rather than spent (as is shown in the gas-price stimulus example). In the rest of this posting, I will examine the size and impact of this gas-price fiscal stimulus….
Read the rest of this entry →
