Fiscal stimulus package up for judgment

In the wake of highest GDP contraction in seven years, several economic experts offered their take on the recent crisis and weighed in on the costs and benefits of a fiscal stimulus package during a Joint Economic Committee hearing in the Dirksen Senate Office Building.

“This is likely to be the most severe recession the United States has experienced in a number of decades,” said Nouriel Roubini, professor of economics at New York University’s Stern School of Business.

“This is going to be much longer, more severe, more protracted than the average U.S. recession.”

Roubini recommended an aggressive fiscal stimulus package priced anywhere between $300 billion and $400 billion, and warned that it should be passed soon.

“We cannot wait until the next congress in February because three months from now, the collapse of spending, consumption, and investments is going to be so sharp that the economic contractions could become even more severe.”

Roubini said that the next package should focus on direct government spending for goods and services since the private sector has decreased its overall consumption.

Richard Vedder, Professor of Economics at Ohio University and visiting scholar at the American Enterprise Institute, said he was “dubious” of a fiscal stimulus package. Vedder said that fiscal stimulus does little to aid the economy, and pointed out the last stimulus package was followed by a decrease in GDP and a rise in unemployment rates. However, if fiscal stimulus is unavoidable, Vedder stated that it should take a different form. “If you’re going to have a stimulus package, certainly a tax cut is preferable to a spending increase…a tax cut would have some more positive long run incentive effects.”

When asked if the Troubled Asset Relief Program, or the bailout bill, was a good idea, Roubini answered it was the right step as long as it was used to inject banks with public capitol. This was a notion agreed upon by Simon Johnson, Ronald Kurtz Professor
of Entrepreneurship at MIT.

“The original design of TARP to buy distressed assets was a bad idea and remains a bad idea. Using those funds to recapitalize the bank system and the insurance industry, and other financial institutions that may need recapitalization as we head into serious recession is a very good, if not essential idea,” said Johnson.

Vedder said that he reluctantly supported the original proposal, but was neutral regarding the revisions.