January 21, 2008
Column: A fiscal stimulus offers limited help
In a sudden and doubtless temporary outbreak of willingness to co-operate, the White House and Congress, cheered on by the Federal Reserve, are working on a plan for fiscal stimulus. The effort is welcome – but the package likely to emerge will make less of a difference than the energy suddenly devoted to the topic would suggest.
A consensus has formed around the need for a temporary fiscal boost of between $50bn and $150bn (the median is still trending upward) to be delivered soon and chiefly in a form that gives cash to people (such as those on low incomes or unemployed) who will actually spend it. Congressional leaders and the administration, aiming to decide something by the State of the Union speech on January 28, are looking at tax rebates, increases in the earned income tax credit, more money for food stamps and unemployment insurance, and temporary investment incentives.
President George W. Bush is not insisting that the agreement include an extension of his earlier tax cuts, otherwise set to expire in 2010. In return congressional Democrats are suppressing their default distaste for measures to help business. With a truce declared on those contentious points, a deal can be done.
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Although it is often difficult to separate automatic (stabilizer) fiscal policy from discretionary policy, the assessment stated by Mr. Crook that automatic stabilizers are weaker in the United States seems inconsistent with the widely accepted belief that European fiscal policy has been far less counter-cyclical than US policy over the last two decades.
Posted by: Robert C. Shelburne | January 22nd, 2008 at 4:42 pm | Report this commentFirst of all I must cite a disclaimer that am by no means an economist - though I have a more than basic education in economics.
Having said that, I completely agree with Mr.Cook that the fiscal stimulus proposed by Congress and the President will offer little (and I must add - temporary) help in easing the on going financial crisis. It is obvious that there is no money in circulation. Why? Most of the people are deep in debt(most beyond recovery)and as such spending all their incomes paying off debts and credit cards AT EXTREMELY HIGH interest rates. So what will a $1600 check help to ease the pain of a person who is $10,000 in debt? Most people will use those rebates towards paying off their debts, mortgages, car loans and not buying consumer items. Which means a month later those people will be back to square one (ie still debt and struggling to pay off their credit cards). So the same financial crisis will return sooner or later. What Congress and the President need to do on top of that economic stimulus to pass some form of legislation (which I have heard Congress has talked about)that will curb the interest rates on credit cards. That is how this vicious cycle will be contained in the long term.
Posted by: Julius | January 23rd, 2008 at 1:54 am | Report this comment