ConclusionLevy Economics Institute of Bard College Strategic Analysis | April 2012
Our three scenarios show that no matter how these policy issues are resolved in the next congressional session, the nation is still likely to be producing at far below its potential output levels when that session begins next January. Moreover, it is very unlikely that unemployment and underemployment will have reached even moderately elevated levels—say, an official unemployment rate of 6 percent. In fact, scenarios 1 and 2 above indicate that the CBO's meager projections of a mild surge in job growth starting two years from now are unrealistic, unless private sector borrowing takes off again. But a macro policy based on a new run-up in private sector debt levels would heighten the risk of a financial crisis, especially in light of the financial threats already facing households, state and local governments, and corporations. Once again, keeping in mind political realities, we urge at least a modest application of fiscal stimulus. Scenario 3 illustrates that a small, tax-financed increase in government investment could lower the unemployment rate significantly—by approximately one-half of 1 percent. Figure 9 depicts the paths of unemployment achieved under each of the three scenarios. Based on our results, we surmise that it would take a much more substantial increase in fiscal stimulus to reduce unemployment to a level that most policymakers would regard as acceptable.
Back to Business as Usual? or A Fiscal Boost?
by Dimitri P. Papadimitriou, Greg Hannsgen, and Gennaro Zezza
(h/t Michael Stevens at Multiplier Effect)