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Sunday, June 29, 2008

Shiller: More Stimulus Needed

by Calculated Risk on 6/29/2008 09:49:00 AM

Robert Shiller writes in the NY Times: One Rebate Isn’t Enough

In January, just before Congress passed the stimulus bill authorizing the rebate checks, Peter R. Orszag, director of the Congressional Budget Office, wrote that, in the current economic situation, there was a risk of “a self-reinforcing spiral (of less lending, lower house prices, more foreclosures, even less lending, and so on) that could further impair economic activity and potentially turn a mild recession into a long and deep recession.”

In his view, there was only a moderate probability that this “self-reinforcing spiral” would take hold. The goal of the rebate checks, he said, would be to lower this probability “to an acceptable value.” He thought that an economic stimulus bill might well make the difference.
Has the tax rebate substantially reduced the probability of a downward spiral?

It is too soon to tell, because the Treasury only started to send out rebate checks in late April. Retail sales did rise in May. But the dreaded serious recession still seems very much a possibility.
And Shiller goes on to argue that more stimulus is needed:
[W]e should be putting in place another stimulus package like the current one, and stand ready for another after that, and another.
With the "2nd half recovery" apparently cancelled, and the immediate effects of the stimulus mostly behind us, it is not surprising that more stimulus is being discussed. But if the stimulus checks go to Saudi Arabia or China, it isn't really helping (there is no multiplier effect).

And it's not clear how a little more consumer spending is supposed to slow the downward spiral of "of less lending, lower house prices, more foreclosures, even less lending, and so on" other than to buy a little time.