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Stimulus Looking Less Justified   February 9th, 2009
CBO adds to mounting predictions that recession will end this year anyway       


More observations...

A CBO report released in January provides yet another source that believes that the recession will be over in 2009 and a recovery will start in 2010. Another CBO report indicates that while the stimulus package will lead to a short-term increase in GDP and a short-term decrease in unemployment, the long-term result of the stimulus package would be reduced growth.

First, the same CBO report that predicted a $1.2 trillion deficit this year (without the stimulus package) also estimated that the current recession would end this year even without a stimulus package or any changes to tax policy.


Under an assumption that current laws and policies regarding federal spending and taxation remain the same, CBO forecasts the following:

* A marked contraction in the U.S. economy in calendar year 2009, with real (inflation-adjusted) gross domestic product (GDP) falling by 2.2 percent.

* A slow recovery in 2010, with real GDP growing by only 1.5 percent...

CBO anticipates that the current recession, which started in December 2007, will last until the second half of 2009, making it the longest recession since World War II. (The longest such recessions otherwise, the 19731974 and 19811982 recessions, both lasted 16 months. If the current recession were to continue beyond midyear, it would last at least 19 months.) It could also be the deepest recession during the postwar period: By CBO's estimates, economic output over the next two years will average 6.8 percent below its potential--that is, the level of output that would be produced if the economy's resources were fully employed (see Figure 1). This recession, however, may not result in the highest unemployment rate. That rate, in CBO's forecast, rises to 9.2 percent by early 2010 (up from a low of 4.4 percent at the end of 2006) but is still below the 10.8 percent rate seen near the end of the 19811982 recession.

In addition, the CBO has indicated that while the passage of the stimulus package would result in a short-term increase in GDP and decrease in unemployment, the long-term result of the stimulus would be a decrease in economic output due to the government's debt "crowding out" available money to the private sector.


CBO estimates that this Senate legislation would raise output and lower unemployment for several years, with effects broadly similar to those of H.R. 1 as introduced. In the longer run, the legislation would result in a slight decrease in gross domestic product (GDP) compared with CBO's baseline economic forecast.

Given that there is an increasing consensus among economists that the recession will not persist beyond this year, and given that the proposed stimulus will actually decrease economic output in the long-term, it's not unreasonable to inquire as to why we are being asked to support an $800 billion debt and spending billion.

Republicans need to stand firm against this spending package. While no-one can predict the future--especially the economic future--there is a growing consensus that things will turn around this year even without the stimulus package. The banking industry needs to be fixed, but there seems to be precious little evidence to support President Obama's assertion that we must pass this spending bill now or face an economic "catastrophe." To the contrary, there is mounting evidence that the recession will not last much longer even without his package.

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