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![handle is hein.taxfoundation/iretcgadv0232 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION
IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing
the public about policies that will promote growth and efficient operation of the market economy.
January 18, 2008
Advisory No. 235
STIMULUS OPTIONS TO AVOID
The U.S. economy is being battered by rising
energy costs, higher food prices, falling home values,
a growing number of mortgage defaults and
foreclosures, huge losses by some debt holders, and
uncertainty about which lenders are most exposed to
future losses. The now punctured housing bubble,
which is tied to some of the problems, appears, in
retrospect, to have had several facilitators: the
Federal Reserve kept short-term interest rates too low
for too long after pushing them down in 2001; new,
unfamiliar debt securities proved much riskier than
originally thought; and credit standards grew too lax.
These adversities are weakening the economy.
Although the nation's real output expanded briskly
through the third quarter of 2007, December's anemic
job growth of 18,000 and its unemployment rate of
5.0% have stoked fears of a slowdown. The
December unemployment rate is not high by
historical standards (unemployment averaged 5.8% in
the 1990s and 5.1% for 2000-2006), but its rise of
0.3 percentage point from the previous month is
worrisome.1 Goldman Sachs and at least one
researcher at Merrill Lynch now predict a recession
in 2008.2 While most economists are unsure if the
economy will slide into recession, the odds look
greater today than they did a few months ago.
Understandably, the economy's problems are
focusing attention on whether the government can
take actions now that would help support economic
activity. What is to be done?
Good fiscal policy according
Times
to the New York
The New York Times, in an editorial,
recommends several tax and spending initiatives
(Editorial, Economic Policy For Tough Times, New
York Times, January 6, 2008, accessed at http://
www.nytimes.com/2008/01/06/opinion/06sun 1 .html
?pagewanted=print). The Times's suggestions
provide a handy guide to some of the policies that
should not be pursued. If the newspaper's advice
were adopted, it would weaken an already struggling
economy and undercut prospects for future growth.
The New York Times sees spending by
governments and individuals as an all-purpose
economic elixir. [S]pending means hope for the
economy, enthuses the Times's editorial staff. The
newspaper views the unemployment data from this
perspective and sees it as most threatening because of
its possible negative impact on spending. A job
means a paycheck, a paycheck means spending, and
fewer jobs force some belt tightening. In other
words, the Times fears that the uptick in the
unemployment rate may throw the economy into
recession because unemployed people spend less than
those who are employed.
According to the Times, the best hope for
rescuing the economy is for the government to
intervene with stimulus measures to increase
spending and the best stimuli are those that would
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