Does the US need a second stimulus package?

Laura Tyson, an advisor to President Barack Obama, said in a speech to day in the lead up to the –8 conference that the ground work for a potential second stimulus bill must be laid now. To be sure, the G-8 leaders are expected to recommend continued policy accommodation worldwide. However, Vice President Joe Biden recently suggested that the Obama Administration has no plans for a second stimulus bill on the political TV show Meet the Press (transcript here).  So, which is it – stimulus or no stimulus?

The U.S. should consider drafting a second stimulus package focusing on infrastructure projects because the $787 billion approved in February was “a bit too small,” said Laura Tyson, an adviser to President Barack Obama.

The current plan “will have a positive effect, but the real economy is a sicker patient,” Tyson said in a speech in Singapore today. The package will have a more pronounced impact in the third and fourth quarters, she added, stressing that she was speaking for herself and not the administration.

Tyson’s comments contrast with remarks made two days ago by Vice President Joe Biden and fellow Obama adviser Austan Goolsbee, who said it was premature to discuss crafting another stimulus because the current measures have yet to fully take effect. The government is facing criticism that the first package was rolled out too slowly and failed to stop unemployment from soaring to the highest in almost 26 years.

Obama said last month that a second package isn’t needed yet, though he expects the jobless rate will exceed 10 percent this year. When Obama signed the first stimulus bill in February, his chief economic advisers forecast it would help hold the rate below 8 percent.

Unemployment increased to 9.5 percent in June, the highest since August 1983. The world’s largest economy has lost about 6.5 million jobs since December 2007.

Clearly, the economic situation is much worse than Obama’s team predicted back in January.  It is leading to rising unemployment and grim statistics on things like consumer default rates.  So, if the $787 billion stimulus package was based on a rosy economic scenario that never happened, it goes to reason that this stimulus bill was too small, as Laura Tyson argues.

Yet, some economists like Mark Zandi of Economy.com agree with Biden that we should take a wait and see approach (video below).

Of course, the wait and see modus could be a disaster as stimulus should take six to nine months to kick in.  If the economy falters in Q4, say, a stimulus might be forthcoming in Q1 2010 with effects coming on line late in 2010 – not a very good scenario for politicians in Congress looking to get re-elected.

So, which is it: stimulus or no stimulus?

Below are two takes on this question.

• The Failure of the Mainstream Model – Stephanie Kelton
• Will Obama go for a second stimulus? No … – James Pethokoukis

And, for the record, I don’t think Obama could get a second stimulus bill through Congress if he tried.

Source

Obama Adviser Says U.S. Should Mull Second Stimulus – Bloomberg