• Question
  • CBO 2008 Study - Options for Responding to Economic Weakness

    Asked on 1/20/2008

    from http://www.cbo.gov/ftpdocs/89xx/doc8916/MainText.4.1.shtml#1069867

    Strong indications suggest that Economic Growth is slowing and will remain sluggish for much of 2008.

    Most professional forecasters are continuing to project Very Slow Growth, as opposed to an outright Recession, this year.

    The Risk of Recession is Elevated, however, and some respected economists believe that the probability of a Recession has now risen to 50 percent or greater.

    Discretionary Fiscal Policy Stimulus (that is, legislative action aimed at providing stimulus) may not be necessary to avoid an outright Recession, if most current forecasts are correct (which they are not!).

    Nonetheless, Policymakers may choose to proceed with a Stimulus Package to bolster a Weak Economy and as insurance against the Elevated Risk of a Recession.

    Some Economists advocating a Stimulus also believe that a Recession, if it occurs, could prove to be "unexpectedly" DEEP; a Fiscal Stimulus would help reduce the severity of a Recession, should one occur.

    Effective Stimulus does not necessarily require addressing the Source of Economic Weakness directly; instead, it requires strengthening Aggregate Demand.

    Although much of the Current Economic Weakness can be traced to the Housing and Mortgage/Credit Markets, other factors, such as the High Price of Oil, have played an important role.

    If Policymakers choose to address problems in the Housing and Mortgage/Credit Markets, possible actions should therefore be evaluated primarily with regard to their effectiveness in Correcting Identifiable Failures in those markets—and not necessarily with regard to their value in counteracting Economic Weakness.

    Policy actions affecting the Housing and Financial Markets may, however, help the Economy by reducing the Risks of a Self-Reinforcing Spiral (of Less Lending, Lower House Prices, More Foreclosures, even Less Lending, and so on) that could further impair economic activity and potentially turn a Mild Recession into a Long and Deep Recession.

    The paper first reviews the Economic Situation, including how the Monetary and Regulatory authorities have already responded.

    The next section assesses different Fiscal Approaches to giving a Temporary Boost to Aggregate Demand in the Economy.

    A final section examines Policy Options geared specifically toward the Housing and Mortgage/Credit markets.

  • Categories: Your Life in Retirement, Politics and Policy


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