New York University Prof. Nouriel Roubini—Dr. Doom himself—was slated to testify at a congressional hearing Thursday about the economic outlook and the need for a second stimulus package.
Here's what he told lawmakers in his written testimony:
The U.S. is currently in a severe recession that will be deeper, longer and more protracted than previous U.S. recessions. The last two economic recessions—in 1990-91 and 2001—lasted each 8 months and the cumulative fall in GDP from peak through the through was only 1.3% in the 1990-91 contraction and 0.4% in the 2001 contraction. In a typical U.S. recession in the post-WWII period GDP falls by an average of 2% and the recession lasts 10 months. The current economic contraction—that my analysis dates as having started in the first quarter of 2008 will last through the fourth quarter of 2009 with a cumulative fall in GDP of the order of about 4% that is even larger than the worst post-WWII recession (the one in 1957-68 when the GDP fall was 3.7%).
Since most components of private aggregate demand are sharply falling right now (private consumption, residential investment, non-residential investment in structures, capex spending by the corporate sector on software and machinery) a major additional fiscal stimulus is necessary to reduces the depth and length of the current economic contraction. And since direct tax incentives have not been effective in boosting consumption and capex spending (as worried households and firm are retrenching their spending) the new round of fiscal stimulus will have to take the form of direct government spending on goods and services (preferably productive investment in infrastructures) and provision to income to those agents in the economy more likely to spend it (block grants to state and local governments, increased unemployment benefits to unemployed workers, etc.).
Given the size of the expected contraction in private aggregate demand (likely to be about $450 billion in 2009 relative to 2008) a fiscal stimulus of the order of $300 billion minimum (and possibly as large as $400 billion) will be necessary to partially compensate for the sharp fall in private aggregate demand.
This fiscal stimulus should be voted on and spent as soon as possible as delay will make the economic contraction even more severe. A stimulus package legislated only February or March of next year when the new Congress comes back will be too late as the contraction of private aggregate demand will be extremely sharp in the next few months. Such policy action should be legislated right away—in a "lame duck" session right after the election—to ensure that the actual spending is undertaken rapidly in the next few months.