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Double dip recession?

January 6th, 2010 · No Comments

We’re not out of the woods yet…

It is not often we agree with Martin Feldstein, but this time we’re afraid he has a point…

Feldstein: Beware 2010 Double Dip When Economy Stalls

By Julie Crawshaw

There is a significant risk the economy could run out of steam sometime in 2010, leading to a double dip recession, warns Harvard University economics professor Martin Feldstein.

Feldstein ties this risk of a renewed downturn after the worst recession in decades to a poorly conceived government stimulus effort, The Wall Street Journal reports.

“I supported the idea we needed to have a fiscal stimulus, somewhat to the dismay of my conservative friends,” Feldstein said Sunday at a meeting of the American Economic Association in Atlanta.

However, Feldstein says Congress did a poor job of designing the stimulus and “delivered much less” in actual stimulus than its nearly $800 billion price tag suggested it should.

“The economy’s growth in the second half of last year was driven by a strong fiscal stimulus, including not only federal spending and transfers but also special subsidies to car buyers and to first-time home buyers,” Feldstein said.

“It will be difficult to have a robust recovery as long as the residential and commercial real-estate markets are depressed and local banks around the country restrict their lending” because of default risk.

Columbia University economist and former White House economic adviser Joseph Stiglitz, says “it is not likely we will have robust growth anytime soon,” Bloomberg reports.

The real estate and finance industries created jobs during the housing boom, “what will really replace the sources of demand?” Stiglitz asks, noting that homeowners with negative equity in their properties are reluctant to move and take newly created jobs in other regions.

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Just like Krugman and Stiglitz, we think there should be a second stimulus package ready, and not one that is designed according to a political logic (or even lack thereoff), but one dictated by economic logic. The aim should be to get the most bang for the stimulus buck.

Where would that be?

  • Aiding states
  • Aiding unemployed
  • Aiding people who are behind with their mortgage payments
  • Preventing foreclosures
  • Building the next generation infrastructure.

It can be done. China has shown the way…

Tags: Opinion · The Markets