Sunday, July 12, 2009

More stimulus?

The debate about the need for a new stimulus package in the US is becoming more prominent among economists (see what Krugman or De Long have to say about it) and news web sites (the WSJ or CNBC are just an example).

What I find interesting is that this debate is taking place when most of the first stimulus package has not been implemented. In a recent conference at the IMF, Doug Elmendorf director of the US Congressional Budget Office, presented a summary of the progress of the first stimulus package. I was surprised to hear that at that point (a month ago), only 6% of the allocated money had been spent. By the end of September, it is likely that this figure will only be 25%.

Some of this delay was expected but it raises questions about what a second stimulus package would do to these figures. Even if we reach the conclusion that the US economy is in a weaker state than what was forecasted when the first stimulus package was approved (and this is probably true), how long will it take to implement a second stimulus package? Will new projects simply be added to the list of the current ones and be implemented a couple of years from now? This is a very important issue that needs to be resolved before we can start thinking about how many more billions of dollars we need to add to the first stimulus package.

As a side note, I find this related article by Paul Krugman very interesting. When it comes to fiscal policy, the burden of proof to show that it is an effective tool is so much higher than when it comes to monetary policy. And I agree with his reading that this is probably because ideologically, more government spending is a much more difficult proposition than lower interest rates.

Antonio Fatás