Fiscal Stimulus - A Long-Term Perspective

The Congressional Budget Office estimates the federal government's budget deficit will grow to $1.2 trillion for the current fiscal year. It is expected that this figure will be revised upward after the enactment of President-elect Obama's enormous economic recovery package (now estimated at $775 billion).

With these extreme levels of debt it is becoming increasingly important that the fiscal measures employed in the stimulus package are capable of providing the economy with not only short-term stimulus, but also long-term social benefits.

The package can hypothetically be structured to increase any of the four sources of demand; consumption, investment, government and exports. Thus far, a significant portion of the package has been allocated to tax cuts ($300 billion over 2 years), which predominantly aims to increase private consumption, as well as capital expenditures (albeit to a lesser degree) in the short to medium term. The jury is still out on whether these tax cuts will be an effective consumption stimulus. My opinion is they will have a moderate effect given the extreme sense of pessimism and risk aversion in the private sector.

With the possibility of increasing exports out of the question (global economic weakness, widespread monetary easing, etc) the remainder of the stimulus package should be focused on government spending on, and investment in, resources and projects that have long-term benefits to the economy and society as a whole. This includes spending and investment incentives directed toward education (and as a result human capital), infrastructure, and alternative energy. Such an initiative would provide the economy with additional short-term support (e.g. increased employment), and more importantly long-term social benefits to the nation. At some point we need to revert back to proper fiscal responsibility and this may be our last hoorah. We need to make it count and in turn be able to realize benefits that reach beyond short-term stimulus and transcend the current economic cycle.