What Went Wrong With Fiscal Policy?

1. What Went Wrong With Fiscal Policy? William T. Dickens University Professor Northeastern University Teach in on the Economy November 13, 2011

2. Two Major Fiscal Policy Actions (Plus a few more) • The American Reconstruction and Reinvestment Act of 2009 (The Obama stimulus bill) • Too little too late. • Since then other things like payroll tax cuts and extended unemployment benefits have helped but not enough • The Troubled Asset Relief Program (the bail out bill TARP that was put forward by Bush and passed with support from both parties) • Did what it was supposed to do – it saved the banking system which saved the economy from a depression • Was not well managed – though nearly all the support to financial institutions has now been paid back and the TARP has cost nowhere near as the original price tag.

3. A Fiscal Solution to the Economic Crisis? Professor William T. Dickens Northeastern University, The Russell Sage Foundation, and The Brookings Institution February 11, 2009

4. What I’m Going to Talk About • How fiscal policy can restore full employment • Why we don’t normally rely on fiscal policy to get us out of recessions but need to now • How much will the fiscal stimulus plan being contemplated help?

5. My View • We face a nearly unprecedented global economic crisis with the potential to be the worst economic catastrophe in 75 years • We need rapid action in the US to shore up our financial markets and to prevent further collapse of employment and income • Fiscal policy will have to carry the main part of the burden of shoring up employment and income because monetary policy has become much less effective than it normally is • The package of fiscal stimulus that looks headed for passage is a step in the right direction but is probably too small to restore full employment and may not come in time to prevent further problems in financial markets • Thus I expect that we will need further rounds of fiscal stimulus before our economy recovers, with the speed of the recovery depending on how quickly we realize and act on this

7. I Think The CBO is Optimistic I don’t yet see what is going to cause the turn around (their model has strong tendencies towards self-correction that I don’t believe are realistic in light of experience of 1982 and 1974 recessions) We have very little experience with effects of credit constriction, but what evidence we have suggests its bad (79-80 and Great Depression) Demand for exports going to be hit hard Could see more rounds of financial panic

9. What is in Senate and House Bills vs. What is Needed (billions of dollars) * Author’s conservative estimate

10. What I Would Have Done Differently • Aim higher – cost of undershooting much worse than overshooting • More of the stimulus upfront (2009) • More relief for state budgets • Further extensions/expansions of Food Stamps, UI, and Medicaid • More tax cuts and consumption subsidies • More shovel ready infra-structure(?) • I am very worried that by not doing enough we are inviting even more problems with financial markets and that the cost of rescuing the economy will continue to climb

11. If We Want To Create Jobs We Need to Create Jobs! • There is plenty of work to do in this country rebuilding roads and other infrastructure. • We need a big spending bill ASAP to put this country back to work or (best case) we can expect to wait another 2 to 5 years to get unemployment down to 6% or so. • Unemployment is bigger problem than debt. We are not Greece. We are more like Japan since we can borrow in our own currency, and they have more debt and interest rates that are equivalent to ours.