January 22,2008

Hearing Statement of Senator Max Baucus (D-Mont.) Strengthening America’s Economy: Stimulus That Makes Sense

Hearing Statement of Senator Max Baucus (D-Mont.)
Strengthening America’s Economy: Stimulus That Makes Sense

Václav Havel once defined “hope” to mean “the certainty that something makes sense.”
We meet today to evaluate what economic policy can give Americans hope. We meet to
discuss what economic stimulus makes sense.

As we meet today, the economy is weak. The housing sector is in a slump. A larger
credit crunch looms on the horizon.

Retail sales dropped in December. In the latest report, the unemployment rate jumped
from 4.7 to 5.0 percent. Some states are already in a recession. And consumer
expectations for a better economy are at a 16-year low.

Today, we’ll consider the arguments for why the economy needs fiscal stimulus. And
assuming that it does, we’ll consider what kind of stimulus makes sense.

To help us answer these questions, we have Peter Orszag, Director of the Congressional
Budget Office.

CBO just issued a report on fiscal stimulus. That report states: “There is a strong
possibility of at least a few quarters of very slow growth” in calendar year 2008.

The Federal Reserve Board appears to believe that the economy is weak enough to need
monetary stimulus. The Fed has already lowered its target for interest rates by one and
three quarters percentage points. Last week, the Chairman of the Federal Reserve Board
said that the Fed would “stand ready to take substantive additional action as needed to
support growth and to provide adequate insurance against downside risks.”

But will monetary stimulus be enough? There are reasons to believe that it might not.
There are reasons why Congress might do well to provide fiscal stimulus.

For one thing, the glut of houses on the market right now might prevent lower interest
rates from having their usual punch. For another, skittish lenders who have suffered
losses as a result of the sub-prime mortgage crisis may remain reluctant to make loans, no
matter how low interest rates go.

Fiscal policy — if enacted quickly — can work faster than monetary policy. And we
need to consider that the economy may be weak enough that we may need fiscal stimulus
to augment monetary stimulus.

Economists differ on the odds of a recession. But either way, fiscal stimulus could be
valuable to improve otherwise weak economic growth, even if we’re not technically in a
recession.

If fiscal stimulus is needed, what kind of fiscal stimulus should we enact? A consensus is
growing that it must be three things: timely, targeted, and temporary.

Stimulus occurs when households and businesses spend any additional income that they
receive, rather than save it. To get households and businesses to spend more money, the
Government can do two things: cut taxes or increase spending.

Fiscal stimulus must be timely. That means that once enacted, the stimulus must take
effect quickly. It needs to be out the door quickly so that the intended recipient can spend
it quickly. Spending in 2011 will not avert a recession in 2008.

Fiscal stimulus should be well-targeted. Stimulus should be targeted on those who most
need the help. And stimulus should be targeted on those who will spend the money
quickest.

Lower- and middle-income households are the ones most likely to need additional
income during a recession. And because the financial resources of these households are
more limited, they are also the ones who will be likely to spend the money quickly.

And fiscal stimulus must be temporary. If fiscal stimulus extends beyond the end of the
recession, it could overheat an expanding economy, causing inflation. Moreover,
permanent fiscal stimulus would increase Federal budget deficits.

So let us think through what sort of economic stimulus makes sense. Let us see what
stimulus can be timely, targeted, and temporary. And let us imagine what sort of
economic stimulus can help to give Americans renewed hope.

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