In Washington over the last two months, the debate was over whether the Stimulus Bill was too large. But the math — that is to say, expected fall in aggregate demand compared with offsetting stimulus spending — suggested a completely different problem. Namely, that it was too small, probably offsetting a half or less than half of the demand sucked out of the economy by the collapse of the housing bubble. And as the Post reports on tomorrow’s front page, the verdict seems to be in: yep, it was too small.
There are many different metrics to use to get to this judgment. But a key one is that the Obama budget, which came out at the end of last month, assumed an average unemployment rate of 8.1% during 2009. Presumably, that was the assumption behind the Stimulus math too. But since we now know that the unemployment rate spiked to 8.1% in February that prediction seems unrealistically optimistic — perhaps by a long shot.
All of which is to say that the monthly economic data are rapidly catching up with the pessimists’ assumption about kind of steep and lasting recession we have in store.
Nor is it only the size of the Stimulus Bill that is implicated in these changing numbers. Because if the administration has been assuming less bleak unemployment rates than we’re likely to see, then the tax revenues that the budget is based on won’t come in and ‘stress tests’ they’re running the banks through probably aren’t stressful enough.
Joining the chorus, Martin Feldstein says we’re likely to need a second Stimulus Bill. Perhaps soon.