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Smith
Faculty Opinion Article
The 30
Seconds Outlook
February 1, 2009
“The stimulus
promoters suffer from man with a
hammer syndrome. . . . A stimulus
may or may not be a good idea. But
it can’t be our only idea. It’s time
to begin thinking more like Keynes.
The first step is to admit The
General Theory is a special theory.
Parts of it we can keep. Parts we
need to chuck. But whatever we do we
need to adapt. We have new problems.
We need new ideas.”
-- Geoff Gannon, Seeking Alpha,
January 26, 2009.
It appears that Obama is trying
to implement a cohesive stimulus
plan built, in part, on Allen
Sinai’s well-known and respected
macroeconomic model of the U.S.
The model has presented several
forecasts: (1) A large stimulus will
not do a great deal for the
economy--the credit and consumer
spending collapses are too strong,
and government spending cannot
replace the loss of consumer demand.
(2) The larger the budget deficit
from government spending and tax
cuts, the larger the subsequent
increases in expected future
inflation and long-term interest
rates. (3) The model predicts the
stimulus will generate an additional
two percentage points increase in
GDP the first year and a one
percentage point increase the
second, and the turn in the economy
may come in mid-2009.
The model also predicts the best
boost to the economy is increased
government spending on goods and
services. In this case, unemployment
drops rapidly and GDP bounces up.
The next best boost comes from
direct federal aid to states and
cities to continue building
projects. In both cases, the boost
in GDP lasts just two years.
To continue GDP growth, private
spending must shoot up. This
continuation is best served by
temporary individual tax credits and
rebates, but these actions take
longer to impact than does direct
government spending. However,
credits and rebates gradually assist
the revival of consumer demand.
Permanent tax cuts for individuals
and business would take longer to
increase GDP, but they have a longer
lasting positive impact on GDP and
employment. I hope Obama gets this
message, rather than following
political dogma. The downside is a
larger deficit than that using
temporary tax credits and rebates.
Assuming the economy finally gets
off of “life support,” we will be
left with inflation and far reaching
specters of huge annual deficits and
larger debt accumulations that will
greatly burden our children and
grandchildren.
John A. Haslem
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