Can Fiscal Stimulus Revive the US Economy?

On Thursday, January 8, 2009, US President-elect Barack Obama said,

I don’t believe it’s too late to change course, but it will be if we don’t take dramatic action as soon as possible. If nothing is done, this recession could linger for years.

Most economists and various commentators are in agreement. They hold that the US government must sharply increase its spending in order to arrest the economic crisis that could turn into a prolonged slump.

According to the Congressional Budget Office (CBO), in the absence of a stimulus plan, the unemployment rate could jump to above 9% by early 2010. Some other experts are of the view that without the stimulus plan the unemployment rate could easily surpass the 10% mark.

Most experts hold that on account of the economic slump and the consequent underutilization of resources, economic output in the next two years will be strongly below the potential output. For 2009 and 2010, the production loss is estimated to be in excess of $2 trillion (the gap between the potential GDP and the actual GDP).

Therefore they believe that the effective way to close the gap between the potential output and the actual output is through the fiscal stimulus package – a large increase in government outlays.

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January 23, 2009