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Saturday, November 22, 2008

Obama: "Act Swiftly and Boldly"

by Calculated Risk on 11/22/2008 07:00:00 PM

From the NY Times: Obama Vows Swift Action on Vast Economic Stimulus Plan

Mr. Obama said he would direct his economic team to design a two-year stimulus plan with the goal of saving or creating 2.5 million jobs, “a plan big enough to meet the challenges we face that I intend to sign soon after taking office” on Jan. 20, an indication that he would begin pushing his plan through Congress even before taking office.
“The news this week has only reinforced the fact that we are facing an economic crisis of historic proportions,” Mr. Obama said. “We now risk falling into a deflationary spiral that could increase our massive debt even further.”
Here is Obama's radio address today (3 min 52 secs):

On the size of the stimulus plan from a Goldman Sachs research note yesterday:
We need a fiscal stimulus package that offsets most of the retrenchment in private spending that remains after offsets from a smaller real trade deficit and lower oil prices. Our recommendation has been a $300-$500bn package, but we regard this as the minimum of what would be desirable. The 4% of GDP that we estimate for the retrenchment amounts to $600bn.

The good news is that the likelihood of a large package under President Obama is rising. Now many economists are calling for $300-$400bn, and some have proposed as much as $600bn; as recently as late October, when we first outlined the case for significant stimulus, $200bn was the highest figure on the table. The bad news is that implementation of whatever is adopted is at least two to three months away absent an extraordinary bipartisan effort. This is unfortunate, as the dynamics of the retrenchment have clearly developed a life of their own.
It sounds like we should expect a massive stimulus package to be signed by the end of January.

There is a good chance the simulus package will be along the lines proposed in September by Larry Summers:
The Composition of Stimulus

In many ways the composition of a fiscal stimulus program is a decision that goes to value rather than economic judgments. It seems to me however that particularly strong arguments can be made for the following components:

Support for low income families and for those who have been laid off is much more likely to be spent rapidly than support diffused more widely throughout the economy. Possible vehicles here include food stamps and extensions of unemployment insurance. [CR Note: President Bush signed an extension of unemployment benefits this week]

There is a compelling case for significant new commitment to infrastructure spending. While infrastructure spending is often seen as operating only with significant lags, I have become convinced that properly designed infrastructure support can make a timely difference for the economy. Evidence from the Minneapolis bridge collapse suggests that it is possible to launch infrastructure programs where the vast majority of the money is spent within a year. Moreover, the combination of declining trust fund revenues, and dramatic (more than 70 percent) increases in some categories of construction costs mean that there are a large number of projects that are currently on hold, slowed down, or contracted and awaiting funding. Properly designed infrastructure projects have the virtue of being helpful as short run stimulus, especially for the employment of the workers most hard hit by the housing decline, while at the same time augmenting the economy’s productive potential in the long run.

State and local governments are facing grave budget pressures resulting in forced cutbacks that in many cases compromise either very vulnerable populations, or necessary long term investments. While it is true that some state and local problems are consequences of imprudent tax cutting during the good times, there is a strong case that properly targeted assistance perhaps through temporary changes in Medicaid reimbursement rules could provide valuable stimulus to the economy while at the same time avoiding dangerous cutbacks.

Other areas that should receive consideration include compensating consumers in the most affected regions for the effects of higher energy prices through LIHEAP [CR note: with falling gasoline prices, this may not be needed] , beginning a process of making necessary investments in energy efficiency and renewable energy and where appropriate, responding to the adverse impacts of the ongoing financial turbulence.