February 27, 2009

AEM Professor Expresses Support for Stimulus

Print More

The federal stimulus package, despite imperfections, will bring promise to the crippled U.S. economy and prevent another Great Depression, Prof. Steve Kyle, applied economics and management, said yesterday in a University-sponsored lecture called “Will the Stimulus Actually Work? Or Are We Looking at a Rerun of the Great Depression?”
“I think they have to do a stimulus plan,” said Kyle. “[The details of the plan are] not precisely what I would’ve picked, but [the plan] certainly will go a long way to [do] the trick.”
[img_assist|nid=35619|title=A stimulating lecture|desc=Prof. Steve Kyle, applied economics and management, discusses the details and implications of President Barack Obama’s economic policies in Warren Hall yesterday, as part of the AEM Current Event Series.|link=node|align=left|width=|height=0]
“Will it be another Great Depression? I don’t think so,” he said. “The government is already doing everything [it] can to counter the downward trend. [President] Hoover proudly cut spending and tried to balance the budgets, which is the exact opposite of what modern economics tells us to do.”
Students who attended the lecture seemed to agree with Kyle’s views.
“I’m very much in support of the stimulus plan,” said Duncan Anderson ’11. “And I’m pretty confident in Obama.”
Kyle explained the necessity of the stimulus plan with the hallmark equation of introductory economics: gross domestic product equals the sum of consumption, investment, government spending and net exports.
Consumer confidence is “way in negative space” according to Kyle, and consequently no one is willing to invest if consumers are not purchasing the products. The rest of the world is also experiencing similar downturns in consumer confidence, so net exports are also decreasing. By process of elimination, increasing government spending is our only hope left, according to Kyle.
As for the best way to go about increasing government spending, Kyle proposed that a good stimulus package — which emphasizes immediate spending and be large enough to provide a “short, sharp jolt” to break the current downward dynamic — should be quickly implemented.
“2009 will be bad, and whether things turn around next year depend on whether the stimulus package and the bank rescue, in fact, will work,” he said.
Kyle also defended many common concerns regarding the stimulus plan, such as the fear of inflation as a result of an overly-stimulated economy.
“If the jolt is not big enough then you just have more debt, and you’re back to a starting point that’s even worse than what you started with,” he said.
Kyle pointed out that currently the federal fund rate is at zero percent, which means it is impossible to use monetary policy to heat up the economy. If the economy does overshoot due to an oversized stimulus package, then the field is wide open for monetary policy to cool it down through open market operations or interest rate increases, he said.
Earlier this week, Obama announced plans to halve the deficit by 2013. Kyle maintained that the stimulus plan does not conflict with this long term goal.
“What he is saying is that we need a big jolt right now, which means the deficit has to be big this year and the next, but we have to come back to fiscal sanity at some point,” he said.
Regarding the tax increase for the wealthy announced yesterday, Kyle said that the U.S. is letting the Bush tax cuts expire.
“We are letting the tax rate go back to that of the 90s, which were a period of the biggest economic booms in the world,” he said.
Does government intervention this size mean socialism? “You betcha,” said Kyle.
“But is it worse than the alternative? The alternative could well be ‘a lost decade,’” Kyle said, reffering to the Japanese stagnation of the 90s, when the country limped for 10 years and lost a massive amount of economic growth.
“Goldman Sachs estimated our gap in demand to be about 10 percent [of the GDP], so our stimulus plan of $400 billion a year [is] nowhere near big enough. However, the $1.75-trillion deficit Obama submitted today is much closer to the estimated gap.”
Even so, others think that many aspects of the stimulus plan are still debatable.
“I feel like a lot is directed towards immediate consumption spending, whereas I feel like the government should be more focused on building an infrastructure and building a solid base for spending in the future,” Anderson said.
“Kyle said that he wasn’t advocating war, but there are some people who do and will, and that worries me.” said Prof. Charles Geisler, developmental sociology.
Kyle worries that the bailout is rewarding managers of the insolvent banks.
“We need to set correct incentives for managers and stockholders. We must force them to think twice and three times before taking decisions to put the financial system in peril,” he said. “The only way to do this is to have them take responsibility.”
Despite all these gray areas, some experts agree the stimulus plan brings much-needed hope to the horizon.
“I think the government will pull us out of the recession. Remember, the G in that equation was the only game in town,” said Geisler. “We’ve got a good leader, a smart leader. Now is [the] opportunity to make it work.”