Recent policies have sought to contain damages spilling over from housing and financial markets
to the broader economy, including monetary policy, which is the responsibility of the Federal
Reserve, and fiscal policy, including a tax cut in February 2008 of $150 billion and two
extensions of unemployment compensation in June and November of 2008. Over the past few
months, the government has also intervened in specific financial markets, including financial
assistance to troubled firms, including legislation granting authority to the Treasury Department
to purchase $700 billion in assets.
The broad intervention into the financial markets has been passed to avoid the spread of financial
instability into the broader market but there are disadvantages, including leaving the government
holding large amounts of mortgage debt.
With the worsening performance of the economy, congressional leaders and President-Elect
Obama have now proposed much larger stimulus packages, ranging from $600 to $850 billion,
comprised of spending and tax cuts. The package under discussion may contain some proposals
considered but not adopted during the 2008 debate, and could include infrastructure spending,
revenue sharing with the States, middle class tax cuts, business tax cuts, unemployment benefits,
and food stamps.
The need for additional fiscal stimulus depends on the state of the economy. The National Bureau
of Economic Research (NBER), in December 2008, declared the economy in recession since
December 2007. Growth rates, after two strong quarters, were negative in the fourth quarter of
2007, positive in the first and second quarters of 2008, and a negative 0.5% in the third quarter.
According to one data series, employment fell in every month of 2008. The unemployment rate,
which rose slightly in the last half of 2007, declined in January and February of 2008, but began
rising in March and in December stood at 7.2%. Some forecasters believe that the ongoing
financial turmoil will result in a recession that is deeper and longer than average.
Fiscal policy temporarily stimulates the economy through an increase in spending which also, if
not offset by increases in revenue, increases the budget deficit. There is a consensus that certain
proposals, ones that result in more spending, can be implemented quickly, and leave no long-term
effect on the budget deficit, would increase the benefits and reduce the costs of fiscal stimulus
relative to other proposals. Economists generally agree that spending proposals are somewhat
more stimulative than tax cuts since part of a tax cut may be saved by the recipients. The most
important determinant of the effect on the economy is the stimulus? size. The recent stimulus
package increased the deficit by about 1% of GDP.
This report will be updated as warranted by legislative and economic events.