US economy needs big stimulus

Jan.11, 2008 5:30 pm


Hillary Clinton has announced a proposed stimulus package of 70 billion dollars. Sounds like a lot,   but in fact its way too small to make much difference as the slowing down of the US economy gathers steam. Remember the US economy has a 13.97 trillion dollar GDP.
140 billion dollars would be a 1 % stimulus, 280 billion a 2 % stimulus and 420 billion a 3 % stimulus. Its only at this level of magnitude and beyond that fiscal stimulus would have some positive impact. 70 billion is simply way too small.

Currently the American deficit as of 2007of 244 billion dollars is 1.7 % of the GDP ( source:Office of Management and budget) If one added say say 420 billion dollars to the current deficit and targeted very carefully in terms of lower and middle class tax cuts or rebates,including rebates for purchasing more fuel efficient vehicles and retrofitting homes to save energy, and also included a capital works program of much needed infrastructure repair and got the Fed to lower interest rates rates substantially the impact would be very positive.

During the second World War the US ran deficits that were as follows:

1942 14.94 % of the GDP
1943   31.01 % of the GDP
1944   23.27 %   of the GDP
1945   21.9 % of the GDP

These deficits led to a debt that peaked at 119.75 % of the GDP in 1946.
The current US   gross debt is $9,196.5 billion.   The gross debt to debt to GDP ratio is   65.7%.The   defict to GDP is currently 1.7 %..(Source : US Treasury)

This means that the net debt to GDP ratio is somewhat smaller. So there is plenty of room to safely temporarily increase the deficit to about 5 % of the GDP to lessen the impact of the recession and shorten its duration.

Since oil prices are cartel driven they should not be a prime consideration in calculating whatever inflationary impact a deficit resisted recovery might produce.In the beginning of a recovery almost all of the vector forces will be on output rather than price. As recovery proceeds the longer term strategy of detaching the US from the influence of the cartel through greater energy efficiency and increased North American supplies can proceed.
As well the Fed can also tighten its stance but only once the downword momentum is clearly reversed.