Last Friday the President spoke about the need for additional Congressional action on the economy. Outsiders are referring to this as fiscal stimulus. We’ve been calling it a growth package.

There’s a lot to say, so I’m going to break this up into three big parts.

1. what the President proposed;
2. why the President proposed it; and
3. today’s bipartisan agreement, and why we support it.

1. What the President proposed last Friday

Here are the President’s remarks from last Friday. They’re short and well worth reading, and they contain a lot of substantive content.

To put it simply, the President proposed that Congress pull the fiscal policy lever to increase economic growth (GDP) this year. You’ll remember (or not) from your macroeconomics course that there are two basic governmental tools for addressing the short-term economic picture. The Federal Reserve has a monetary policy lever, and the Congress has a fiscal policy lever. The Federal Open Market Committee pulled their lever on Tuesday, by cutting both the federal funds rate and the discount rate by 0.75 percentage points (experts say “75 basis points”). We studiously refrain from commenting on the Fed and its tools.

Last Friday the President described the shape of an effective growth proposal. He did this instead of laying out a detailed proposal, in part at the request of Congressional leaders on both sides of the aisle, to allow them some flexibility in their negotiations. It appears to have worked.

To actually increase GDP in the near term, an effective growth package must be:

• Big enough to move the needle on a $14.5 trillion economy. The President proposed a package that’s 1% of GDP, or about 145 billion dollars in 2008. That’s 50% — 100% bigger than what Congress has been discussing for the past two weeks.
• Immediate. This means (i) Congress should pass legislation immediately. (ii) Policies with immediate macro effects are better than those with lagged effects.
• Based on tax relief. Individuals, families, and businesses will react quickly (and more effectively) if they are deciding how to spend more of their own money. Government bureaucracies react slowly.
• Broad-based. Many were emphasizing “targeted.” In contrast, we think policies should be neutral and distort decisions as little as possible. We have a macroeconomic focus on sectors of the […]