Fiscal Policy in the Second Half of 2009
A DRAFT of a letter I might send next week:
Dear President Obama--
At the end of 2008, when your incoming administration was preparing your recession-fighting strategy, your forecasts were that the
recession would bottom out in August of 2009, with a peak unemployment rate of 7.9%. The unemployment rate in May was already 9.4%. 10% unemployment this year is a nearly foregone conclusion. 11% unemployment--a recession twice as deep as the one your incoming administration was forecasting at the end of 2008--is not unlikely.
An 11% unemployment rate would carry along with it an underemployment rate--a U-6--that would kiss 20%.
Even had the fiscal expansion plans of your administration not been cut back by roughly a quarter in their employment-generating effectiveness by the Congress, fiscal stimulus plans that appeared to be adequate and appropriate at the turn of the year now appear to be inadequate.
Compounding the problem of inadequate fiscal expansion at the federal level is the problem of inappropriate and substantial fiscal contraction at the state level. Last fall Nobel Prize-winning Princeton economist Paul Krugman feared "fifty Herbert Hoovers"--fifty states each trying to balance its budget year-by-year and each one delivering a substantial drag on employment and income in its and its neighbors' economies.
I therefore believe:
That it is past time for you to seek from the Congress for authority to guarantee the debt of states that, in response to the current recession, (a) seek to conduct their own state-level fiscal expansions, and (b) devise plans and strategies for the long-term repayment of the debt the federal government guarantees that the Secretary of the Treasury certifies as prudent and sustainable.
That it is time for you to seek from the Congress an amended Budget Resolution: to include in this year's forthcoming Reconciliation process an additional $500 billion of federal aid to states, distributed per capita and conditioned on their maintaining effort at the provision of public services--on their not repeating the mistake of Herbert Hoover of cutting government employment and spending in a downturn.
Sincerely yours,
J. Bradford DeLong
