Friday, November 14, 2008

China enacts large stimulus-U.S. needs one!

Sixty-seven thousand (67,000) Chinese factories have closed and tens of thousands of workers have been laid off since the beginning of the year. As a result, the Chinese government announced a $568 billion stimulus program, 7% of GDP, aimed at bolstering its faltering economy.

The United States has lost 1.3 million private sector jobs since January while the ranks of the long-term unemployed have grown at record rates.

Goldman Sachs economists are predicting that the unemployment rate (now 6.5%) will rise to 8.5% by the end of next year and go even higher in early 2010 because "U.S. domestic demand and production are dropping sharply." The cumulative trough-to-peak projected increase of more than 4 percentage points in the jobless rate would be the most since World War II.

Like China, the United States needs a bold stimulus program.

Nobel Prize winning economist, Paul Krugman, is urging U.S. policy makers to think big, suggesting a back-of-the- envelop number of $600 billion. That's a significantly smaller percentage of the U.S. economy than the Chinese plan, but much bigger than the $300 to $400 billion plans currently being discussed in Washington.

Krugman notes that if the stimulus package is larger than needed and the economy overheats, the Fed can easily raise interest rates to head off the threat of inflation. But if the stimulus is too small, there is nothing the Fed can do since interest rates are already at historic lows.

The Bush administration and Congress moved quickly when Wall Street and its highly paid CEOs were teetering on the edge of financial collapse. Now that the middle class is facing a similar catastrophe they are dithering while America is burning.

Krugman's column is linked here.

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