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Argument: Economic stimulus packages can be well timed to maximize benefits

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Supporting evidence

  • Congressional Budget Office. "Options for Responding to Short-Term Economic Weakness". January 2008 - "The recognition lag is a major challenge in applying discretionary fiscal policy, but it may not be as critical as it was before the 1990s. One of the most severe recognition lags occurred in the 1974 recession, when economists generally did not perceive the economy to be in a recession until well after it had begun. This meant that the tax rebates ultimately adopted to spur the economy did not take effect until March 1975, after the economy had already started to recover. During the two most recent recessions (in 1990 and 2001), by contrast, economic weakness was recognized relatively quickly. Concerns about slow growth—a slowing that subsequently was dated as a recession that started in August 1990—were raised in September 1990. Similarly, the stock market crash that started early in 2000 alerted economists to the possibility of a recession, and by January 2001 economists generally expected very slow growth. The 2001 recession was subsequently dated to have begun after March of that year. One of the problems that made it difficult to recognize the poor state of the economy during the 1974 episode—a high rate of inflation that distorted the perception of the underlying weakness in real economic activity—has not been a problem in recent decades.
The experience of the past two recessions suggests that recognition lags need not always impede effective stimulus. If the policy is well designed, and if the lags in enacting and implementing it can be kept short, a moderate fiscal stimulus could well attenuate the depth of an incipient contraction or severe slowdown in economic activity. Economic data and economic forecasts can provide relatively reliable and timely indications of the likelihood of an extended period of very slow growth. Policymakers still have to be aware, however, that these measures may falsely indicate the need for stimulus. The economy may quickly bounce back without stimulus, and latent inflationary pressures may be greater than currently perceived.
Given the inherent uncertainty about the economic outlook and the lags in enacting fiscal policy, policymakers may want to develop a fiscal stimulus package before the need for such a policy is certain but include in the legislation a 'trigger' to implement the stimulus. A trigger could take various forms, such as a decline in the level of employment over a three-month period or an increase of 0.4 percentage points over 12 months in the three-month moving average of the unemployment rate. The purpose of such a trigger would be to reduce the likelihood that the policy is implemented when it is not necessary. Specifically, it is not now known whether the weakness in the current economic data is foreshadowing a deep and prolonged recession or a transitory period of weakness as the economy adjusts to the housing and financial market shocks. Legislation that included a trigger would 'pre-position' a stimulus package, making it more timely if the trigger point was hit, but it would reduce the likelihood that additional demand was added to a recovering or strong economy. To concentrate stimulus when it was most needed, the policies would have to turn off when the economy had sufficiently recovered. (In some sense, such a pre-positioned stimulus package would represent a new automatic stabilizer.) However, economic data can send mixed signals around a recession, which raises uncertainty about choosing the appropriate indicators to turn the stimulus on and off. Moreover, a number of economists have argued that the economy has already weakened by enough to justify a modest and temporary stimulus and that an explicit legislative trigger is therefore not currently needed."

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