Fiscal Stimulus--Is More Needed?

Dimitri Papadimitriou, Greg Hannsgen and Gennaro Zezza

Economics Strategic Analysis Archive from Levy Economics Institute

Abstract: In its November 2007 Strategic Analysis, the Levy Institute's Macro-Modeling Team called for an immediate, sustained fiscal stimulus of 2 percent of GDP, as well as a plan for a much larger additional fiscal stimulus should the economic slowdown continue over the next two to three years. Since then, conditions have significantly worsened. Foreclosures reached an all-time high late last year, and home prices have continued to fall. According to Federal Reserve flow-of-funds data, household net worth declined by over $500 billion in the fourth quarter alone. In response, Congress approved a $168 billion stimulus package earlier this year, one made up largely of tax rebates that will begin arriving in May. While the authorities have not declared a recession in progress, many economists have begun to speculate how steep a possible downturn might be. In this latest Strategic Analysis, President Dimitri B. Papadimitriou and Senior Scholars Greg Hannsgen and Gennaro Zezza explore the possibility of an additional fiscal stimulus of about $450 billion spread over three quarters, challenging the notion that a larger and more prolonged additional stimulus will be unnecessary and generate inflationary pressures. They find that, given a projection of even a moderate recession, an additional $600 billion stimulus would not be too much. They also find that a temporary stimulus—even one lasting four quarters—will have only a temporary effect. An enduring recovery will depend on a prolonged increase in exports, the authors say, due to the weak dollar, a modest increase in imports, and the closing of the current account gap.

Date: 2008-04
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