By Francis M. Bator
Shoring up lenders, unclogging lending, even direct action to limit the slide in house prices, will no longer suffice to prevent a severe recession. Only public or private spending on output will prevent spiralling cutbacks in production, jobs and incomes.
Action to boost spending should be temporary, phased out as the economy recovers. But it should be large enough to make a difference. It takes about $500bn growth in total spending each year just to keep unemployment rates and capacity utilization constant. Each extra percent of unemployment costs $250bn-300bn per year in lost pre-tax wages and profits.
Here are two examples of fiscal action that would be easy to implement, quick to boost spending, and unusual enough to make timely reversal credible. Read more