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By Philippe Legrain 1 COMMENT

Now, the United States tried a fiscal stimulus in early 2008; both
the Bush administration and congressional Democrats touted it as a plan
to "jump-start" the economy. The actual results were, however,
disappointing, for two reasons. First, the stimulus was too small,
accounting for only about 1 percent of GDP. The next one should be much
bigger, say, as much as 4 percent of GDP. Second, most of the money in
the first package took the form of tax rebates, many of which were
saved rather than spent. The next plan should focus on sustaining and
expanding government spending—sustaining it by providing aid to state
and local governments, expanding it with spending on roads, bridges,
and other forms of infrastructure.

The usual objection to public spending as a form of economic
stimulus is that it takes too long to get going—that by the time the
boost to demand arrives, the slump is over. That doesn’t seem to be a
major worry now, however: it’s very hard to see any quick economic
recovery, unless some unexpected new bubble arises to replace the
housing bubble. (A headline in the satirical newspaper The Onion
captured the problem perfectly: "Recession-Plagued Nation Demands New
Bubble to Invest In.") As long as public spending is pushed along with
reasonable speed, it should arrive in plenty of time to help—and it has
two great advantages over tax breaks. On one side, the money would
actually be spent; on the other, something of value (e.g., bridges that
don’t fall down) would be created.

In short, Nobel laureate Paul Krugman says a fiscal stimulus needs to:
1. be big (unlike in the UK, where it amounts to only 1% of GDP)
2. prioritise government spending rather than tax breaks (unlike in the UK, where it consists mainly of a temporary VAT cut).

Posted 30 Nov 2008 in Blog
  1. JasonQ says:

    Income-generating projects must be implemented instead of looking for the person to be blamed because of the financial crisis.Recovery takes a process to occur but one thing is for sure. It will never happen unless it is started.State spending was about $10 billion per state annually on corrections. Many people feel that this is far too much so are considering changes to save cash. Most people would love to see less offenders who don’t need to be jailed released and then monitored in order to free up a little more on the state budget. It is estimated that many offenders do not need to be incarcerated if they haven’t committed any violent crime. It is hard to justify locking someone away for some minor offenses. It seems some codes in the law may get some corrections of their own.

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