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Continued Economic Weakness Means We Need MORE Stimulus... Yeah, That’s the Ticket!



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Boomer Greed, thy name is the New York Times editorial board:

Congressional Republicans say continued economic weakness is proof that February’s stimulus package failed. Lawmakers in both parties fret that large budget deficits preclude more stimulus, lest the burden of debt outweigh the benefit of deficit spending.

Both arguments are wrong. If anything, ongoing economic problems are a sign that stimulus needs to be bolstered. Deficits are a serious issue, but the immediate need for stimulus trumps the longer-term need for deficit reduction.

Pile more debt on the kids! We need to keep our retirement portfolios nice and stimulated.

David Einhorn, the hedge-fund manager who predicted the Lehman disaster, takes a different view: Sooner or later, we’re going to have to take the hit, and it would be much better for the country if we got it over with:

We are now being told that the most important thing is to not remove the fiscal and monetary support too soon.  Christine Romer, a top advisor to the President, argues that we made a great mistake by withdrawing stimulus in 1937.  
 
Just to review, in 1934 GDP grew 17.0%, in 1935 it grew another 11.1%, and in 1936 it grew another 14.3%.  Over the period unemployment fell by 30%.  That is three years of progress.  Apparently, even this would not have been enough to achieve what Larry Summers has called “exit velocity.”

Imagine, in our modern market, where we now get economic data on practically a daily basis, living through three years of favorable economic reports and deciding that it would be “premature” to withdraw the stimulus.

An alternative lesson from the double dip the economy took in 1938 is that the GDP created by massive fiscal stimulus is artificial.  So whenever it is eventually removed, there will be significant economic fall out.  Our choice may be either to maintain large annual deficits until our creditors refuse to finance them or tolerate another leg down in our economy by accepting some measure of fiscal discipline.



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