Comment & Debate
“In need of more Band-Aids”. Economist. September 4th, 2008 – THE American economy entered the summer on a strong note as GDP grew by an annualised 3.3% in the second quarter. That figure, released last week, was much better than the first estimate of 1.9%, and mostly reflected a strong trade performance. Another important factor was that, despite rising unemployment, soaring fuel prices and constricting credit, consumer spending managed to grow at a 1.7% annual rate. For that, thank a fiscal stimulus package that included $110 billion in tax rebates, of which $92 billion had been disbursed by early July. Without those cheques, Macroeconomic Advisers, a forecasting firm, figures that consumer spending would not have grown at all.
“Filling the hole”. Economist. Dec 11th 2008 – Tax rebates or tax cuts will get more money into consumers’ hands quickly, but in today’s environment much of that boost will simply be saved, as people plug the holes in their finances left by the collapsing values of their houses and retirement portfolios, or just pay off debts. If consumers are unwilling to spend, the best way for a government to boost demand is to spend more itself. One approach is to send large dollops of federal cash directly to America’s struggling states: unlike the federal governments, these are not allowed to run deficits, so when their revenues decline, they are forced to lay off workers and cut back on services. This reinforces the downswing in the economic cycle rather than countering it. By increasing its share of joint spending schemes, such as Medicaid, the federal government can counter that decline. But the scale of stimulus that is required calls for more.
Ben Bernanke said on January 11th – “The incoming administration and the Congress are currently discussing a substantial fiscal package that, if enacted, could provide a significant boost to economic activity”.[1]