Tuesday, December 09, 2008

Calls for $1 trillion stimulus package grow as economy tumbles

Calls for $1 trillion stimulus package grow as economy tumbles

The one thing that isn't shrinking in the U.S. economy these days is the size of the stimulus package that financial experts say is needed to turn it around.

With automobile sales dropping, payrolls plunging and manufacturing contracting, economists from across the political spectrum are raising the ante on how much the government should lay out. Some are now calling for at least a $1 trillion boost.

My comments: What's another Trillion Dollars when we're already $8.6 Trillion into the bailouts (Link)? At the rate we're going, I expect the bailout figures to surpass our national debt in early 2009.

Question: How long do you think it would take to pay back our national Debt if we stopped accumulating debt and repaid $1 for every second in the future? Does the year 325,447 AD sound ok to you? Link (and this is on top of our nearly $60Trillion in currently unfunded liabilities - meaning future obligations & promises that COULD be paid "IF" we had the $60T in the bank TODAY - Not future inflation adjusted dollars!)

Kenneth Rogoff, a Harvard University professor who was an adviser to Republican presidential candidate John McCain, and Joseph Stiglitz, a Nobel Prize winner who served in President Bill Clinton's White House, are among those who say President-elect Barack Obama should push for a package of that size.

"They need a stimulus of $500 to $600 billion a year for at least two years to counter what is going to be a collapse in consumption," said Rogoff, a former chief economist at the International Monetary Fund.

That number may grow. Last week brought news that the economy has been in recession for a year and employers cut 533,000 jobs last month. It was biggest drop in monthly payrolls since 1974.

Obama, who has said that enacting a stimulus plan will be his top priority once he takes office on Jan. 20, has been steadily increasing the amount he thinks is needed. Early in the presidential campaign, he proposed a package worth $50 billion, then raised that to $175 billion as the election approached. Advisers have since said the program may total as much as $700 billion, although that number, too, may rise.

Whatever its size, the package is likely to include tax cuts, aid to the states, higher unemployment benefits and increased spending on infrastructure such as roads and bridges.

New Jersey Governor Jon Corzine said Washington needs to step in because the U.S. is caught in a "liquidity trap," where repeated interest-rate cuts by the Federal Reserve fail to boost the economy because banks don't want to lend and skittish consumers and companies don't want to borrow.

Adam Posen, a former New York Fed official, agreed that's a lesson to take from Japan's experience during the 1990s, when it faced a similar situation. Posen said Japan's economic-recovery packages at times didn't seem to work because they turned out to be smaller than first announced and were slow in coming.

The Obama team is aware of that problem. "We hear that Japan invested over a trillion dollars in infrastructure and nothing happened," Vice President-elect Joe Biden told a meeting of state governors on Dec. 2. "Well, it's all about how rapidly we can get these projects up and running."

Although some conservative economists agree that a big stimulus package is needed, they argue that it should focus on tax cuts, not on increased government spending on infrastructure. Some advocate a cut in the payroll tax, which is paid by employees and businesses, because it would give consumers more money to spend and businesses more incentive to retain staff.

Some bond-market investors also are worried about the swelling stimulus and the impact it will have on the budget deficit and ultimately the economy.

"A stimulus of this magnitude helps push government debt as a percentage of GDP closer to dangerous levels, when inflation and interest rates start to rise," said Thomas Atteberry, who manages $3.5 billion in fixed-income assets at First Pacific Advisors in Los Angeles.

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