Stimulus package has costs.THE PROPOSED FISCAL stimulus package just passed by the House of Representatives is the single largest one- time stimulus ever, in the whole history of the world. I support the effort-in part--but whatever your feelings, it is worth trying to understand it.
As I've written before, for the stimulus to influence this recession, it has to happen quickly, as in before the leaves return to the trees in Indiana. Very little of the proposed spending in the House plan will do this. Indeed, virtually nothing but the tax cut will affect the domestic economy before the end of summer. This will almost certainly be past the trough of the recession, and so contribute minimally to the recovery.
The economy is not bad enough, yet, for us to risk erring dramatically I continue to hear great depression comparisons, but here in Indiana it will take something like 40 more months of job losses like those of November (the worst month so far) for us to have the great depression unemployment rates. A miscue on timing and we can have Jimmy Carter level inflation in 2010.
This type of accelerated spending now isn't necessarily a bad idea, but it all depends heavily upon what we buy Since we're going to have to borrow the money, the benefits of spending the money now should be greater than the benefit of waiting (since we have also to pay interest). Too much spending on any one thing will drive up prices (like asphalt).
President Obama will have to count heavily on the states, two thirds of whom are in dire financial straights with a handful in real crisis. Rarely has Federal government policy relied so much on the Governors. Expeditious and clever spending on roads, infrastructure and in the half dozen states where it is possible, a tax cut, will determine the success of the stimulus plan.
Mr. Obama risks much, for failure in choosing fast and effective spending will crumble any hopes for real domestic spending for the next four to eight years.
STICKY PRICES AND THE RECESSION
Many folks have noted that gasoline and food prices have come down more slowly than they rose. Economist call these 'sticky prices' and they are a lot like the extra pounds many of us packed on during the holiday, they come off a lot more slowly than they came on.
Sticky prices are central to our understanding of what causes recessions. The inability of prices to move smoothly and rapidly to the new levels that would clear markets cause producers to cut production--which in aggregate leads to a recession. The more sluggishly that prices adjust to the new reality, the longer and deeper the recession.
Interestingly, the chief economists of the Clinton, Bush and Obama administrations are all leading proponents of this view. They most likely will be watching prices as well. When prices hit bottom, so too will the economy. Sadly, like those extra holiday pounds, we have a few more months for those 'sticky prices' to come down.
LATEST PREVIOUS YEAR % PERIOD PERIOD AGO CHANGE U.S. DEC. 08 135,489.0 136,013.0 138,078.0 -0.4 INDIANA DEC. 08 2,908.5 2,951.6 3,020.8 -1.5 MANUFACTURING EMPLOYMENT (000) U.S. DEC. 08 12,981.0 13,130.0 13,772.0 -1.1 INDIANA DEC. 08 500.9 510.7 546.9 -9.0 NON-MANUFACTURING EMPLOYMENT (000) U.S. DEC. 08 122,508.0 122,883.0 124,306.0 -3.0 INDIANA DEC. 08 2,407.6 2,440.9 2,473.9 -1.4 UNEMPLOYMENT RATES (%) U.S. DEC. 08 7.2 6.8 4.9 INDIANA DEC. 08 8.1 6.9 4.5 ANDERSON DEC. 08 9.2 7.7 5.9 BLOOMINGTON DEC. 08 6.6 5.6 3.7 COLUMBUS DEC. 08 6.5 5.5 3.5 ELKHART/GOSHEN DEC. 08 15.3 12.4 4.7 EVANSVILLE DEC. 08 6.7 5.9 4.3 FORT WAYNE DEC. 08 8.2 6.8 4.7 GARY/HAMMOND DEC. 08 8.3 6.9 4.6 INDIANAPOLIS DEC. 08 6.7 5.9 3.9 KOKOMO DEC. 08 9.9 8.6 5.0 LAFAYETTE DEC. 08 6.2 5.4 3.7 MICHIGAN CITY DEC. 08 9.2 7.2 5.1 MUNCIE DEC. 08 8.3 7.3 5.0 SOUTH BEND DEC. 08 8.3 7.3 5.0 TERRE HAUTE DEC. 08 8.5 7.0 5.1 PERSONAL INCOME ($BILLIONS) U.S. DEC. 08 12,093.0 12,118.0 11,924.0 -0.2 INDIANA IIIQ. 08 218 218.5 211.2 3.2 RESIDENTIAL BUILDING PERMITS INDIANA DEC. 08 643 844 848 -23.8 U.S. employment figures are seasonally adjusted. Principal Source: Ball State University, Bureau of Business Research.