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Economy needs an even larger stimulus for desired 'short, sharp jolt,' says CU economist

The $787 billion economic stimulus bill just signed by President Barack Obama might seem like a lot of money, but one Cornell economist thinks it might not be enough to get the economy humming again.

Steven Kyle, associate professor of applied economics and management and a frequent commentator on macroeconomic issues, also made some predictions in his Feb. 26 lecture, "Will the Stimulus Actually Work? -or- Are We Looking at a Rerun of the Great Depression?" The event packed B45 Warren Hall and sparked a lively question-and-answer session.

One prediction: The rest of 2009 promises to be "ugly," as housing prices continue to decline, and commercial real estate will also likely face a similar decline.

Another: Although there is no doubt that "enough stimulus can in fact do the trick, from that point of view I don't think the current stimulus is big enough."

During deepening recessions, it's good for government to offer large stimulus packages that deliver a "short, sharp jolt" to the economy, Kyle said, particularly when such avenues as monetary policy and federal interest rates are stymied. He noted that interest rates are currently at zero -- "No bullets left in that gun," he said.

The federal budget Obama is now presenting to Congress contains a $1.75 trillion deficit. That level of debt-to-gross domestic product (GDP) ratio is "the kind of size we ought to be looking at" in terms of stimulating the economy, Kyle said.

He pointed out that peak stimulus spending during the Great Depression caused the national debt to rise to 25 percent of GDP. In contrast, the just-passed economic stimulus bill would bring the national debt to only 3 percent of GDP.

"Half-hearted" stimulus is worse than too much, he warned, because it deepens debt but brings no positive results.

Stimulus spending works by pouring money into various sectors and projects and triggering spending by people and businesses, and thus a return to consumer confidence, he said. Extending unemployment benefits is an example of stimulus spending that will bring immediate results, he said.

Aiding state governments is also effective, Kyle said, because "state governments always spend every penny they have." Tax cuts are not as effective for stimulus, he noted, because people can choose to either spend or save the extra money. He pointed to last May's economic stimulus checks, only about half of which were spent.

Economic recovery also involves helping major national banks, which are currently holding mortgage-related assets that are worth little to nothing. Large institutions like Citibank and Bank of America are "limping along," and the solution thus far seems to be to "throw money" at them, Kyle said.

Kyle said he favors having the government taking over the banks, stripping out the bad assets and reselling them back to the private sector. This would help restore confidence in the banking system, and it would also set correct incentives for bank managers and stockholders in the future, he said.

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Blaine Friedlander