Pumping Life Back intoPumping Life Back intothe U.S. Economythe U.S. EconomyWhy a Stimulus Package Must Be Big and TargetedWhy a Stimulus Package Must Be Big and Targeted

Presentation by Presentation by

Scott Lilly, Senior FellowScott Lilly, Senior Fellow

Center for American ProgressCenter for American Progress

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U.S. Non Farm PayrollsJan 2008 to Jan 2009

3.5 Million Jobs Lost Since Jan 2008

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Growth of Hourly Productivity & Hourly Wages1950 to 1980

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Balanced Growth

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Growth of Hourly Productivity & Hourly Wages1950 to 1980

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Growth of Hourly Productivity & Hourly Wages2000 to 2008

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Change in Annual Income of Middle Income Households2000 to 2006

Very Different Outcomes for Middle Income Families

1994-2000 compared to 2000-2006

Easy Credit

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Federal Reserve Discount Rate

Lending Money Below the Rate of InflationFederal Reserve Discount Rate Compared to Consumer Price Index

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Turning Homes into ATM MachinesValue of New Mortgages Less Value of Home Purchases & Renovations

(Quarterly Data from J anuary 1952 to March 2008 Expressed as Percentage of Personal Disposable Income)

A boom in mortgage refinancings that began in 2002 resulted in a $1.7 trillion transfer of funds from home equity into consumer spending betw een 2002 and 2007.

Credit expansion by the Treasury & Federal Reserve did not solve the problem!

• After injection of credit, productivity was even higher, output greater and income had stayed the same.

• Easy credit did not simply delay the day of reckoning, it made it much worse.

“Not your Father’s Business Cycle”

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How Do Recent Recessions Compare to the 1930s

Unemployment

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Unemployment 1976 to 1996 Compared to 1926 to 1946

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Deficits as a Percentage of GDPFiscal Years 1932 to 1943

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Deficits and Unemployment 1929 to 1949(Deficits Expressed as Percent of GDP)

Unemployment

Deficits

How much will consumers and businesses cut back on spending?

Some crystal ball gazers say more than 10%

10% X 14.5 trillion (U.S. GDP) = $1.45 trillion

How Do You Fill a $1.45 Trillion Hole?

• Government Spend as Much as Possible

• Provide Tax Cuts

• Restore Consumer Confidence

Possible Pump Priming Plan

• Fed Spending $450 b X 1.6 = $765 billion

• Tax Cuts $250 b X 1.0 = $250 billion

• Boost Consumer Confidence? = $400 billion

Impact of Package $1.465 Trillion

CBO Scoring of H.R. 7110  2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 09-13 04-18 2018+

Clean Water                          

Budget Authority 7,500 0 0 0 0 0 0 0 0 0 7,500 0 0

Estimated Outlays 300 1,520 2,250 870 490 170 98 49 32 20 5,430 369 1,701

  4.0% 20.3% 30.0% 11.6% 6.5% 2.3% 1.3% 0.7% 0.4% 0.3% 72.4% 4.9% 22.7%

                           

Highway Construction                        

Budget Authority 12,800 0 0 0 0 0 0 0 0 0 12,800 0 0

Estimated Outlays 4,096 5,760 1,536 1,152 256 0 0 0 0 0 12,800 0 0

  32.0% 45.0% 12.0% 9.0% 2.0% 0.0% 0.0% 0.0% 0.0% 0.0% 100.0% 0.0% 0.0%

Unemployment Compensation and Job Training                  

Budget Authority 6,490 0 0 0 0 0 0 0 0 0 6,490 0 0

Estimated Outlays 6,115 250 125 0 0 0 0 0 0 0 6,490 0 0

  94.2% 3.9% 1.9% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 100.0% 0.0% 0.0%

                           

Temporary Increase in Medicaid Matching Rate                  

Budget Authority 12,190 2,475 5 5 5 5 5 5 5 5 14,680 25 25

Estimated Outlays 12,190 2,475 5 5 5 5 5 5 5 5 14,680 25 -25

  100.0% 20.3% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 120.4% 0.2% -0.2%

                           

Temporary Increase in Food Assistance (Food Stampts)                

Budget Authority 2,623 30 5 5 0 0 0 0 0 0 2,663 0 0

Estimated Outlays 2,623 30 5 5 0 0 0 0 0 0 2,663 0 0

  100.0% 1.1% 0.2% 0.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 101.5% 0.0% 0.0%

Capacity?

Annual Figures

$1.4 trillion is probably the amount needed each 12 months for the next 18 to 24 months

• $825 billion for the next 3 to 4 years is probably half the amount needed

How is the $820 Billion in the House Stimulus Package Divided?

$355

Discretionary Spending

Tax Cuts$270

Medicaid$90Unemployment

& Other Entitlement

$110

How is Likely Senate Package Divided?(Approximately)

Tax Cuts$375

Discretionary$284

Medicaid$90

Unemployemnt and Other

$100

Macro Economic Impact of Senate Changes?Macro Economic Impact of Senate Changes?

$70 billion shift from domestic spending to taxes:

$70 billion x 1.40 = $98 billion

$70 billion x 0.49 = $35 billion

Can We Can We

Afford It?Afford It?

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2007U.S.. Public Debt as a Percentage of GDP

(1929 to 2007)

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arkPublic Debt as Percentage of GDP

(for 15 Developed Countries in 2007)

Questions?Questions?