Thursday, December 11, 2008

More stimulus needed

I do appreciate the desire of the incoming administration to put a lot of resources into infrastructure improvements, but the accelerated pace of job loss strongly suggests that even $350 billion over the next year focused on infrastructure will simply not be enough to "trickle" around to the full economy fast enough to recover from current job loss or job loss to be expected next year before the stimulus kicks in strongly enough to induce employers to stop cutting jobs, let alone start hiring again in a dramatic fashion. Besides infrastructure investment that will directly create certain kinds of jobs and boost certain sectors of the economy, there needs to be direct stimulus to consumers on an ongoing monthly basis until we see at least a hint of health returning to the jobs market. Something on the order of $50 billion per month is needed, like, now, or starting ASAP in February. That number could decline as employment picks up, but it actually could take two full years or more to recover from the business confidence destruction we have seen to date. That would be $600 billion per year. And that would be on top of the $250 to $350 billion per year for infrastructure investment.

So, we are potentially looking at close $850 to $950 billion per year, close to $1 trillion per year, for at least two years.

Seriously, that is the magnitude on the destruction that has been done to our economy.

Absent any significant stimulus to support and resurrect the economy, it could take five to ten years to gradually rebuild the economy. Such an extended period of contraction and very slow growth would certainly qualify as at least a low-grade depression.

The open question is what will happen to employment and income and economic activity if the stimulus falls far short of that number and amounts to only $250 billion for instructure investment. The result would probably be something on the order of half a million jobs lost every month for upwards of a year and a half, spiking unemployment to 15% or above, and for a number of years. That may not qualify for a true depression, but try convincing anybody who is experiencing the loss of job and income.

The $500 to $700 billion number from earlier in the fall was before we knew that Detroit was in such deep trouble and before many of the current job cut announcements.

And if Congress botches the Detroit bailout and car sales continue to plunge, the outlook will only get worse and the required stimulus will only grow larger. But the prospect of Detroit imploding may have the advantage of convincing people that more stimulus is needed.

-- Jack Krupansky


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