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Outlook for the Economy in
2009
Steven Kyle
Cornell University
December 2008
Christmas Spending Plans
Year
Average Spending
Percent Change
2008
$431
- 50%
2007
$859
- 5%
2006
$907
- 4%
2005
$942
- 6%
2004
$1,004
+ 3%
2003
$976
- 6%
2002
$1,037
-1%
2001
$1,052
+ 9%
2000
$968
+ 3%
1999
$939
+ 1%
1998
$928
+ 34%
American Research Group Survey Nov10-13; Tel. Interview with 1,100 Adults
The Gap in Demand
• GDP = C + I + G + Net Exports
• C is down – People have rediscovered
savings
• I is down – Why invest if nobody is
buying?
• NX is down – The rest of the world is in
recession also
• That leaves only G able to expand
What Kind of Stimulus?
• DO
– Make it soon
– Contribute directly to immediate spending
•
•
•
•
Extend Unemployment
Aid to state government
Aid to already-in-the-pipeline projects
Try to promote long run growth where possible
• DON’T
–
–
–
–
Make it piecemeal
Think that tax cuts will necessarily be spent
Imagine that incentives to lend = actual lending
Implement permanent programs unless they contribute to long
run growth and productivity
How Much?
• Historical Context
– WW2 is what got us out of the Great
Depression – Deficits ranged as high as 20%
of GDP – That was likely more than enough
but still, it was huge
– Chinese just announced stimulus of 20% of
GDP
• Goldman Sachs estimate of current gap at
around 10% of GDP
• Too much less dangerous than too little
NAHB Housing Market Index – Builder Confidence
J
F
M
A
M
J
J
A
S
O
N
D
2001 52 58
60
59
58
59
57
59
55
46
48
55
2002 58 58
62
61
61
61
61
55
63
61
62
63
2003 62 63
56
55
60
63
65
67
67
69
68
69
2004 68 66
66
69
69
68
67
70
67
69
70
71
2005 70 69
70
67
70
72
70
67
65
68
61
57
56 54
51
46
42 39
33
30
31
33
33
18
2006 57
2007 35 39
36
33
30
28
24
22
20
19 19
2008 19 20
20
20
19
18
16
16
17
14
Source: Builders' Economic Council (BEC) Monthly Surveys
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