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Is a Second Stimulus Package a Necessity

The first stimulus plan has not achieved much and there are many people who feel that a second stimulus plan is a necessity if we look closely at the economic situation today. One of the main advocator of a second stimulus plan is Joseph Stiglitz, a Nobel economics laureate. He is professor in Columbia University and the former chief economist of World Bank. Stiglitz has brought to attention of the public certain facts which the nation’s economy is facing and these problems can only be solved by another stimulus package.

According to Stiglitz, although a major economic devastation has been averted by the first Stimulus Plan, the situation is still grim and one cannot say that there is a recovery. He mainly points out the fact of widespread unemployment, which is causing the economy to stagnate. The official figures show the unemployment rate to be 10%, but in reality it is much more. There are quite a few people who are unemployed and not looking for work anymore, and these figures have to be taken into account. If we take these people into account the real rate of unemployment is above 19% and growing. Stiglitz predicts that in 2010 this figure will rise even more if the government does not make another stimulus package to create further jobs.

The second stimulus package will have to aim at creating an annual growth of at least 3%, so that the unemployment rate can be cut in half. Stiglitz, feels this may not happen even till the year 2011 as this type of growth rate was firstly based on a bubble economy in which borrowing played a major role for people to live beyond their means. This had increased the consumption which unnaturally fuelled the economic growth. We cannot actually wish for more consumption in the present economic situation as we do not want a repeat of people trying to live beyond their means. This means that without the required consumption, more investments are not possible and that will retard the growth and resultant recovery.

The second observation which Stiglitz has made is about the rising amount of foreclosures and has predicted that about 3 million more homes are headed that way. He has observed that 25% of homes have a resale value which is below the mortgage debt amount. The major concern now is that banks should ease further the mortgage terms or the economy could again slip drastically. Stiglitz has also strongly criticized the banks for not showing any restraint in risk taking, as they were lured by immediate profits.

Stiglitz also feels strongly about the transfer of money which is happening to Wall Street from the government. There are no proper regulations in place at Wall Street and there can be a repeat meltdown in another 5 years or so. Stiglitz maintains that it is the duty of the Treasury Secretary to impose stringent regulations on Wall Street so that this does not happen again.

Tags: bank, Economics, government, jobs, money, mortgage, risk, Stimulus

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