Economic Stimulus: Issues and Policies

Recent policies have sought to contain damages spilling over from housing and financial markets to the broader economy, including monetary policy, which is the responsibility of the Federal Reserve, and fiscal policy, including a tax cut in February 2008 of 150 billion and two extensions of unemployment compensation in June and November of 2008. Over the past few months, the government has also intervened in specific financial markets, including financial assistance to troubled firms, including legislation granting authority to the Treasury Department to purchase 700 billion in assets. The broad intervention into the financial markets has been passed to avoid the spread of financial instability into the broader market but there are disadvantages, including leaving the government holding large amounts of mortgage debt. With the worsening performance of the economy, congressional leaders and President-Elect Obama have now proposed much larger stimulus packages, ranging from 600 to 850 billion, comprised of spending and tax cuts. The package under discussion may contain some proposals considered but not adopted during the 2008 debate, and could include infrastructure spending, revenue sharing with the States, middle class tax cuts, business tax cuts, unemployment benefits, and food stamps. The need for additional fiscal stimulus depends on the state of the economy. The National Bureau of Economic Research NBER, in December 2008, declared the economy in recession since December 2007. Growth rates, after two strong quarters, were negative in the fourth quarter of 2007, positive in the first and second quarters of 2008, and a negative 0.5 in the third quarter. According to one data series, employment fell in every month of 2008. The unemployment rate, which rose slightly in the last half of 2007, declined in January and February of 2008, but began rising in March and in December stood at 7.2. Some forecasters believe that the ongoing financial turmoil will result