Thursday, February 12, 2009

Stimulus II

Now that the stimulus bill is virtually a done deal, it is time to start thinking about what the next phase of stimulus should look like. The current stimulus package will have some positive effect on the ecnomy, but there is still a lot more painful restructuring of businesses needed that will leave millions more people out on the street in the coming months. Another 700,000 workers filed for unemployment insurance in the past week alone. The number of ex-workers on unemployment insurance is approaching 6 million. And there is no end in sight. Sure, there will be some firms that will begin rehiring over the next couple of months as some of the stimulus kicks in, but many firms will still be faced with declining revenues over those same months.

The current stimulus package is a decent stopgap measure, but it is still only a partial solution. Even if it creates several million jobs over the next two years, there will continue to be millions of people with no significant income and many millions of those who still have jobs who become more frugal, further savaging consumer spending.

By June, a lot of the reality of the current stimulus and ongoing restructuring of the economy will be somewhat more obvious, so that July might be an excellent timeframe for considering Phase II of stimulus.

My current thinking is that a "Stimulus II" package should include:

  1. Direct stimulus to consumers, on the order of $50 to $100 billion per month "until further notice". Sure, some people will save much of this, but that will help to shore up consumer balance sheets, which is a necessary component of getting the economy on a sounder footing. Besides, there are so many millions of people out of work for whom "saving" is not an option. This spending would phase out as real consumer income gradually and eventually improves.
  2. Increased government business investment spending on the order of $50 to $100 billion per month to spur demand for the goods and services of businesses. Businesses need to see higher demand and actual revenues before they start hiring in earnest. The simple reality is that we need a somewhat bigger government component in the economy to protect people from serious economic episodes such as this one. There is plenty of room for expansion of government services - paid for by the government, but provided by the private sector.
  3. Provide government funding to venture capital firms which are experiencing extreme difficulty raising funds from traditional sources (big banks, pension funds, and insurance companies) due to the credit crunch and skrinkage of the economy, on the order of $2 to $3 billion per month.

That would be a start. I am sure that even more is needed. But, maybe not a lot more. Basically, we need to keep stimulating until unemployment is low again, and then gradually withdraw stimulus as the private sector picks up the slack.

The key is that unless there is sustained stimulus, we risk facing a "1937" problem, where the U.S. actually began recovering from 1934 to 1937, but then ran out of steam and declined again and languished until another form of stimulus appeared (World War II.)

-- Jack Krupansky

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