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Are We There Yet?

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The National Bureau of Economic Research (NBER) is the organization responsible for calling a recession, "a recession".  They determine when a recession begins based on their definition: 

“A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real [inflation-adjusted] GDP [gross domestic product], real income, employment, industrial production, and wholesale-retail sales.”

The last time NBER's Business Cycle Dating Committee called a recessionary period was in 2001, for the 8-month period beginning March 2001 and ending November 2001.

The November 2001 trough was announced July 17, 2003.
The March 2001 peak was announced November 26, 2001.

The CBO, in their January 2008 report Options for Responding to Short-Term Economic Weakness indicate five economists, "Richard Berner (Morgan Stanley), Martin Feldstein (HarvardUniversity), William Gross (PIMCO), Robert Shiller (Yale University) and Lawrence Summers (Harvard University) have all stated that the probability of a recession this year is greater than 50 percent."

All too often the media is full of reports about how this or that economist missed the boat on a forecast, but we'll give these guys the benefit of the doubt and agree that we'll probably have a recession this year.

Although a recession won't be called until 'after the fact' our economy is now operating in slow motion, so now what?

The Federal Reserve has been taking bold actions to keep the economy running on an even keel, but even the Big Bank may not be able to stop the tsunami caused by the subprime mortgage mess.  There are still 1.7 million subprime ARMs that will reset in 2008 and 2009.

Many of the 2008 presidential hopefuls have put together various stimulus packages.  Whether or not a stimulus package is needed to jump-start the economy has pretty much been answered, while the remaining question becomes what type of stimulus package will best serve our failing economy.

Three questions must be answered when looking at the various proposals.

  1. Are they cost effective? 
  2. Are they timely - do they provide a quick fix to the economy?
  3. How sure are we of the end result?

The CBO has listed nine possibilities and prepared a chart (page 20) indicating the pros and cons of each.

  • Lump-Sum Rebate
  • Temporary Tax Reduction
    • Withholding Holiday for the Employee Payroll Tax
    • Across-the-Board Tax Rate Cut
  • Deferring or Eliminating Scheduled Tax Increases
    • Extending the AMT Patch
    • Deferring or Eliminating Tax Rate Increase under EGTRRA or JGTRRA
  • Cut in Corporate Tax Rates
  • Incentives for New Investment
  • Extending Operating Loss and Carryback Provision
  • Direct Transfer Payments to Households
    • Extending or Expanding Unemployment Benefits
    • Temporarily Increasing Food Stamp Benefits
  • Providing General Aid to State and Local Governments
  • Investing in Public Works Project

Deciding what to do shouldn't be complicated if you look at the prior stimulus packages put into place during the Bush administration - they didn't work, so obviously a different approach is needed.  

Providing tax cuts to the rich and tax and investment incentives to big business, just didn't provide the goals sought - unless the goal is to bankrupt the rest of us.

A review of the Consumer Price Index, CPI, report issued January 16, 2008 could provide an excellent case for directing the brunt of a new stimulus package to those needing it most, the poor and middle class.  The increases in basic necessities over the past year; food, energy and medical costs has impacted all of us, but has been especially detrimental to the poor and middle class. 

Nearly all the indicators have gone up considerably in the 12-months ended December 2007 v. the 12-months ended December 2006, with Energy commodities having the biggest increase at 29.4%, followed by Energy at 17.4%, Transportation 8.3%, Medical Care 5.2%, Food and Beverages 4.8%, Energy Services 3.4%, Other Goods and Services, 3.0%, Housing and Education at 3.0% each, Recreation at .8% and Apparel at -.3%.

The percentages indicated above are a sum of all items within a particular index.  Some increases in the food and beverage group over the past year are milk up 19.3%, cheese up 13.0%, cereal up 5.4%, bread up 10.5%, fruits and vegetables up 5.9%, and meats, poultry, fish and eggs up 5.4%.

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Richard E Walrath and Patricia L Johnson are co-owners of the Articles and Answers News and Information sites.
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I'm not convinced that the object of the Bush ... by John Sanchez Jr. on Saturday, Jan 19, 2008 at 8:11:14 AM