US Budget Watch Blog

U.S. Economy In Recession

USBudgetWatch.org — Thu, 01 Jan 1970 00:00:00 -0500

December 1 - The National Bureau of Economic Research's (NBER) Business Cycle Dating Committee determined formally on November 28th that the U.S. economy is in a recession. The Committee found that the economy peaked in December of 2007, ending a 73 month period of economic expansion. Although two months of negative economic growth is a common rule of thumb for determining whether or not the economy is in recession, the Business Cycle Dating Committee uses a more complex set of measures to make the formal declaration. The Committee defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators."

The current recession is already longer than 8 of the last 10 postwar recessions, with the average being 10 months. Although the Dating Committee does not make any projections, many experts believe the economy will not bottom out until the middle of 2009, at the earliest -- which would make it the longest recession since the Great Depression.

Krugman Defends Stimulus Through Deficit Spending

USBudgetWatch.org — Thu, 01 Jan 1970 00:00:00 -0500

December 1 - In his New York Times
op-ed column, economist Paul Krugman argues that a very large stimulus package,
paid for with deficit spending, would improve the country's long-term economic
health. He writes:

The claim that budget deficits make
the economy poorer in the long run is based on the belief that government
borrowing "crowds out" private investment - that the government, by issuing lots
of debt, drives up interest rates, which makes businesses unwilling to spend on
new plant and equipment, and that this in turn reduces the economy's long-run
rate of growth. Under normal circumstances there's a lot to this argument. But
circumstances right now are anything but normal.

Krugman cites the 1937 financial crisis in the
U.S. and the Japanese "Lost Decade"
as two examples where tightened fiscal policy, in his view, reduced private
investment and entrenched already-existing recessions.

CRFB Urges Fiscally Responsible Stimulus

USBudgetWatch.org — Thu, 01 Jan 1970 00:00:00 -0500

November 26 - In a CRFB press release
issued today regarding potential stimulus packages, the committee recommends that any stimulus
should include a credible mechanism for paying back debt generated after the
economy recovers.
CRFB acknowledges that the U.S. is in serious economic difficulty and another
stimulus may be necessary, but cautions policymakers to account for the long-term danger that massive public debt poses by weakening the economy
or even causing economic crisis. An excerpt of the release from
CRFB President Maya MacGuineas:

"Politicians
will be offering policies they were supporting before the downturn by calling
them 'stimulus' now...One of the real tests will be if we are willing to cover the
costs of all these stimulus measures once the economy can afford to. If we
don't, we run the risk that the next economic crisis will be as a result of the
trillions of dollars in new government debt we are racking
up."

Economist Proposes Independent Fiscal Policy Council

USBudgetWatch.org — Thu, 01 Jan 1970 00:00:00 -0500

November 26 - Writing on the New York
Times " blog Economix," economist Alan Krueger suggests that President-elect
Obama should create a
politically independent Fiscal Policy Council that would evaluate government budget and
economic initiatives. Fiscal policy would continue to be formulated
through the political process, but
the independent council would report to Congress, the White House, and
the public on whether such policies are likely to achieve goals of job growth, price stability,
sustainable economic growth and shared prosperity. Krueger said about his
proposal:

Not only
would an independent Fiscal Policy Council improve the transparency of
government policies, it would also provide an incentive for policy makers to
pursue sensible policies. Politicians would be embarrassed if the Fiscal Policy
Council panned their legislative initiatives. We have learned in the current
financial crisis that economic policy is too important to leave to normal
interest-group politics. Especially in an era without divided government, an
independent Fiscal Policy Council could provide an external check on economic
policy.

Obama Calls for Stimulus and Budget Reform

USBudgetWatch.org — Thu, 01 Jan 1970 00:00:00 -0500

November 26 - Yesterday, as
President-elect Obama reiterated his belief that a large stimulus package was
necessary, he cautioned that the government also must control spending in order
to address the ongoing economic crisis.
Said
Obama:

But if we're going to
make the investments we need, we must also be willing to shed the spending we
don't. In these challenging times, when we are facing both rising deficits and a
sinking economy, budget reform is not an option. It is an imperative. We cannot
sustain a system that bleeds billions of taxpayer dollars on programs that have
outlived their usefulness, or exist solely because of the power of a politician,
lobbyist, or interest group. We simply cannot afford
it.

This isn't about big
government or small government. It's about building a smarter government that
focuses on what works. That is why I will ask my team to think anew and act anew
to meet our new challenges. We will go through our federal budget -- page by
page, line by line -- eliminating those programs we don't need, and insisting
that those we do operate in a sensible cost-effective
way.

At the speech, Obama
introduced his nomination of Peter Orszag and Rob
Nabors as Director and Deputy Director of Office of Management and Budget,
respectively.

Fed Commits Additional $800 Billion to Unfreeze Credit

USBudgetWatch.org — Thu, 01 Jan 1970 00:00:00 -0500

November 25 - The Federal
Reserve pledged an additional $800 billion today across several different
initiatives to help unfreeze credit markets. $100 billion of funds will go to
purchasing debt directly from Fannie and Freddie Mae, while another $500
billion will be used to purchase mortgage-related securities backed by Fannie,
Freddie or Ginnie Mae. The final $200 billion will be lent through the newly-formed Term
Asset-Backed Securities Loan Facility (TALF) to support loans for consumers and
small businesses. For a chart of other recent actions by government in response
to the financial crisis, see pages six and seven of CRFB's "Guide to Stimulus
Proposals"

Government Rescues Citibank

USBudgetWatch.org — Thu, 01 Jan 1970 00:00:00 -0500

November 24 - Regulators stepped in to rescue financial services giant Citigroup Inc., which has over $2 trillion
in assets and is currently the second
largest US bank. The Treasury gave the troubled bank $20
billion in new capital
and guaranteed most of its losses in excess of $29 billion
from toxic mortgage assets. This latest $20 billion infusion
follows a previous $25 billion worth of taxpayer money that was transferred to Citigroup earlier this
fall as part of the TARP
plan.
In return for the cash and guarantees, the government
will get $27 billion of preferred shares paying an 8 percent
dividend.

Obama, Democrats Propose $700B in New Spending, Seek to Create 2.5 Million Jobs by 2011

USBudgetWatch.org — Thu, 01 Jan 1970 00:00:00 -0500

In a radio address, president-elect Obama announced his
intention to create an economic plan that would add 2.5 million new jobs to the
economy within two years of his taking office. Obama
detailed some of the programs that the proposal would include:

We'll put people back to work rebuilding our crumbling roads
and bridges, modernizing schools that are failing our children, and building
wind farms and solar panels; fuel-efficient cars and the alternative energy
technologies that can free us from our dependence on foreign oil and keep our
economy competitive in the years ahead.

In related news, Obama and
other Democratic leaders have indicated that they will
seek another stimulus package of up to $700 billion (as
distinguished from the $700 billion TARP plan) to address the financial
crisis. This new stimulus package would fund public-works projects, cash
to promote green technology and alternative-energy sources, along with targeted tax cuts for working families,
students, the elderly and job-creating businesses. Obama's previously proposed stimulus package totalled roughly $190 billion.

Obama Chooses President of NY Fed Geithner as Treasury Secretary

USBudgetWatch.org — Thu, 01 Jan 1970 00:00:00 -0500

NBC reports that President-elect Barak Obama will choose New York Federal Reserve Bank President Timothy J. Geithner
to serve as his Secretary of the Treasury. Geithner, 47, was a key
economic advisor to the former President Bill Clinton and an undersecretary of
the Treasury under former Treasury Secretary Lawrence Summers.

As Treasury Secretary, Geithner
would have the responsibility to administer the $350 billion remaining in the
Troubled Assets Relief Program (TARP) that Secretary Paulson has indicated he
will leave for the incoming Obama economic team.

Hoyer Addresses Fiscal Issues

USBudgetWatch.org — Thu, 01 Jan 1970 00:00:00 -0500

November 21 - Recently, House Majority Leader Steny Hoyer
(D-MD) addressed the National Press Club, expressing the need for both short-term, deficit-financed
stimulus and long-term fiscal responsibility. As Hoyer
explained:

"Fiscal hawk
that I am, I still believe that [more
borrowing] is the right course, because a wide consensus of
economists tells us that deficit spending is both the way out of recession like
this one and the way to prevent even more catastrophic decline."

At the same time he
argued:

"In the
long run, fiscal responsibility can and must be a watchword of our majority... We
are now experiencing the stark, painful reality that debt does, indeed,
matter...We must pay for what we buy, but more than that, we must buy the right
things. Wise investments will grow our economy, guard our national security, and
protect the health of our people... We have a window to truly set our fiscal house
in order, ensuring the public and the markets that, even as we make necessary
investments today, we are prepared for the years to come."