March 17, 2009

More Stimulus Needed to Slow Spiraling Unemployment and Deepening Recession

For Immediate Release: March 17, 2009
Contact: Alan Barber (202) 293-5380 x115

WASHINGTON D.C.- With the nation in the midst of what may be the deepest economic downturn since the Great Depression, a new report from the Center for Economic and Policy Research (CEPR) makes the case for a third round of economic stimulus to help put the country on the path to economic recovery.

The Housing Crash Recession and the Case for a Third Stimulus,” points out that many of the economic projections that policymakers have used to form their responses to the recession are already proving to be overly-optimistic. To counter spiraling unemployment and the turmoil in the housing and stock markets, the paper suggests an additional stimulus package, advocates housing policy based on targeted stabilization of house prices in non-bubble and deflated markets, and the necessary correction of the dollar.

“The majority of economists and policymakers missed or downplayed the housing-bubble,” said report author and CEPR Co-Director Dean Baker. “As a result, the nation was ill-prepared to deal with the severity of the recession and previous stimulus packages were simply not enough to put out the fires and slow the downturn.”

To get money into the economy effectively and quickly, the report proposes a stimulus package consisting, in part, of two tax credits: an employer tax credit that would extend health care coverage and another per worker credit for employers increasing the amount of paid time off.

To address the collapsing housing market, the paper makes the point that housing price stabilization is a good idea, but only in areas where there was no bubble or in which the bubble has already deflated. Adopting a one-size-fits all solution runs the risk of merely providing a temporary break before prices begin to plummet again in bubble-inflated markets and increases the risk of over-shooting trend levels in non-bubble markets.

The report also argues that for the nation to fully recover from this recession the dollar should be allowed to fall. To address the U.S. trade imbalance. And even though the Chinese Prime Minister has recently complained about holding U.S. Treasury bonds, there is no cause for alarm to keep U.S. goods from becoming hyper-competitive in world markets, other nations will have no alternative but to prevent the dollar from falling too far, if its value begins to fall substantially.