Transcript Outlook for the Economy in 2009

Stimulus or Depression?
Steven Kyle
Cornell University
February 2009
Christmas Spending Plans
Year
Average Spending
Percent Change
2008
$431
- 50%
2007
$859
- 5%
2006
$907
- 4%
2005
$942
- 6%
2004
$1,004
+ 3%
2003
$976
- 6%
2002
$1,037
-1%
2001
$1,052
+ 9%
2000
$968
+ 3%
1999
$939
+ 1%
1998
$928
+ 34%
American Research Group Survey Nov10-13; Tel. Interview with 1,100 Adults
What Will 2009 Look Like?
• Still a way to go down in real estate
– Commercial real estate just starting
– House prices still need to fall
• Stimulus won’t kick in right away
– Only just now signed into law
– Further lags after that
• Monetary Policy all used up
• Consumer Confidence still at rock bottom
Will it Turn Around?
• IF we get a big enough stimulus then yes
• Eventually, ratios will return to historical levels
• See for example
– Autos
– Household debt
The Gap in Demand
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•
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GDP = C + I + G + Net Exports
C is down – People have rediscovered savings
I is down – Why invest if nobody is buying?
NX is down – The rest of the world is in
recession also
• That leaves only G able to expand
What Kind of Stimulus?
• DO
– Make it soon
– Contribute directly to immediate spending
•
•
•
•
Extend Unemployment
Aid to state government
Aid to already-in-the-pipeline projects
Try to promote long run growth where possible
How Much?
• Historical Context
– WW2 is what got us out of the Great Depression –
Deficits ranged as high as 25% of GDP – That was
likely more than enough but still, it was huge
– Chinese just announced stimulus of 20% of GDP
• Goldman Sachs estimate of current gap at
around 10% of GDP
• Too much less dangerous than too little
Pushing on Strings
– Don’t think that tax cuts will necessarily be spent
• Consumers saved a large part of last May’s stimulus
check
• What would YOU do with sudden influx of money?
– Don’t imagine that incentives to lend = actual
lending
• Banks don’t want to lend for good reason
About those banks …
• Throwing money will work
– If we throw enough we WILL make them solvent
• Buying toxic assets
– The problem is at what price to buy them?
• If at market price then problem isn’t solved
• If above market price then we should get ownership
• But nobody knows the right price because there is no
market in these assets
Nationalize the Banks?
• Pros
– If we are shoveling more money than they are
worth then we should get ownership
– If we don’t get ownership then we are bailing out
stockholders and managers
– If we don’t inflict pain on managers why should
they avoid doing it again?
– Automatic mechanism to recoup bailout money
– It has been done successfully before
Nationalize the banks?
• Cons
– Governments make poor bankers
• But are they worse than the geniuses who brought us
this mess?
– Ohmygod it’s SOCIALISM
• But only temporarily – Will sell them back later
– Politics very difficult