Why It’s Too Early to Pull Back on Stimulus Programs

By Rob Weigand

Everyone generally agrees that the US and global equity markets have heroically priced in a remarkably optimistic scenario since the March stock market lows. An intelligent consensus appears to be emerging that government stimulus programs deserve some credit for this, as financial markets and the US economy are showing some signs of stabilization. John Hermann and Ron Insana had a spirited debate on this topic on CNBC on June 15. Hermann’s more optimistic, forecasting a slow but stable recovery as the stimulus programs help the global economy build momentum through 2011. Insana’s a bit more pessimistic, but does a fine job of thwarting Trish Regan’s “concerns” about government intervention while emphatically stressing that the Fed’s massive monetary stimulus efforts, both traditional and untraditional, must remain in place. You can watch the interview here:

The Shape of the Recovery

Dominique Strauss-Kahn, head of the International Monetary Fund, made comments similar to Insana’s, stressing in a recent interview that the worst of the global economic downturn may still lie ahead and that world governments should maintain or increase their stimulus efforts:

Worst of Crisis May be Yet to Come: IMF Chief

Paul Krugman just published an analysis suggesting that this is the third time we’ve witnessed a liquidity trap — the point in an economy where traditional monetary stimulus stops working. The first time was the Great Depression, and the second time was Japan in the 1990s. Both times government stimulus was prematurely withdrawn, and both times the result was a relapse into economic contraction:

Stay the Course

Of course, the consensus is far from unanimous. Those wild-eyed prophets at The Wall Street Journal see things differently. If you’re so inclined, you can watch reporter Jonathan Weisman fan the fears of socialism:

Summers Says US Not in Danger of Becoming a Socialist State

Overall, considering that world leaders are navigating through completely uncharted waters, the intelligent consensus is that they’ve done far more right than wrong thus far. For an even deeper and more thoughtful analysis of what our economic future will look like, I recommend Mohamed El-Erian’s May 2009 article in which he coins the term “A New Normal.” El-Erian, who has one of the best track records of all the pundits, envisions a higher-savings, slower-growth, low-return, consumer-constrained future where government spending constitutes a greater share of GDP than we’ve become accustomed to in the last quarter century:

Secular Outlook: A New Normal

Finally, if you’re still with me and want yet another intelligent take on our economic future that’s slightly more optimistic than El-Erian’s, Jeremy Grantham’s May 2009 newsletter is a great read (as always). As is the case with many of the authors above, Grantham credits government stimulus programs for his “VL”-shaped economic recovery thesis:

The Last Hurrah and Seven Lean Years

Comments

[whidbey:]

Nice to see Washburn poke its head up.

Of course it is right to be cautious about the recovery and the notion of a the new normal. What has yet to be essayed is the impact on the average income household in the USA. Debt free or low debt living will be vastly different, but how different? What does this mean for future consumption patterns? This is the key to the new economy and new politics. Who will speculate on the future of millions of ordinary people?

Jun 16 11:40 AM

[Robert A. W...:]

Whidbey, thanks for your comment -- I agree that this is an important consideration. One of the major factors contributing to subdued growth and prosperity in the "New Normal" that many of the authors listed above are forecasting is a less leveraged financial, economic and consumer climate going forward.


On Jun 16 11:40 AM whidbey wrote:

> Nice to see Washburn poke its head up.
>
> Of course it is right to be cautious about the recovery and the notion
> of a the new normal. What has yet to be essayed is the impact on
> the average income household in the USA. Debt free or low debt living
> will be vastly different, but how different? What does this mean
> for future consumption patterns? This is the key to the new economy
> and new politics. Who will speculate on the future of millions of
> ordinary people?
>

Jun 17 11:36 AM