NCPA - National Center for Policy Analysis


August 19, 2009

According to Nobel Prize winner and former World Bank chief economist Joseph Stiglitz, stimulus spending has been "slow going" and what is needed "is another dose of fiscal stimulus."  But only $70 billion out of a total $787 billion has been spent; at an annualized rate, this is equal to about one percent of gross domestic product (GDP), say Brian Wesbury and Robert Stein, of First Trust Advisors.

Between October 2008 and March 2009, nominal GDP fell at a five percent annual rate and a stimulus of one percent covers just one-fifth of the drop.  For Stiglitz, a Keynesian, this isn't enough.  But nominal GDP fell just 0.8 percent at an annual rate in the second quarter of 2009.  In other words, economic growth accelerated by about 4 percent at an annualized rate between winter and spring.  Unless the multiplier from government spending is four, this recovery is being caused by something other than stimulus, continue Wesbury and Stein.

That something is really three things, say Wesbury and Stein:

  • First, mark-to-market (MTM) accounting was finally relaxed by FASB in the spring of 2009.
  • Second, the Federal Reserve has been running a highly accommodative monetary policy. Liquidity injections have provided a floor beneath nominal GDP growth rates.
  • Third, the panic that was set off last September by the failure of Lehman Brothers, the proposal of the $700 billion TARP plan and a terrifying speech by President Bush is finally ending.

Moreover, broad stock market indexes are up nearly 50 percent from their bottom as corporate earnings have handily beaten estimates.   As the economy picks up in the next few quarters, top-line revenues will accelerate, which will boost profits to even greater heights.

Over the next 12 to 18 months we can expect higher stock prices, more inflation, higher bond yields and a relatively stable dollar.  The economy is improving, stimulus or not, say Wesbury and Stein.

Source: Brian S. Wesbury and Robert Stein, "$70 Billion Isn't the Answer," Forbes, August 11, 2009.

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