Outlook for the Economy in 2009 Steven Kyle Cornell University December 2008

2008$ % 2007$859- 5% 2006$907- 4% 2005$942- 6% 2004$1,004+ 3% 2003$976- 6% 2002$1,037-1% 2001$1,052+ 9% 2000$968+ 3% 1999$939+ 1% 1998$ % Christmas Spending Plans Year Average Spending Percent Change American Research Group Survey Nov10-13; Tel. Interview with 1,100 Adults

The Gap in Demand GDP = C + I + G + Net Exports C is down – People have rediscovered savings I is down – Why invest if nobody is buying? NX is down – The rest of the world is in recession also That leaves only G able to expand

What Kind of Stimulus? DO –Make it soon –Contribute directly to immediate spending Extend Unemployment Aid to state government Aid to already-in-the-pipeline projects Try to promote long run growth where possible DON’T –Make it piecemeal –Think that tax cuts will necessarily be spent –Imagine that incentives to lend = actual lending –Implement permanent programs unless they contribute to long run growth and productivity

How Much? Historical Context –WW2 is what got us out of the Great Depression – Deficits ranged as high as 20% of GDP – That was likely more than enough but still, it was huge – Chinese just announced stimulus of 20% of GDP Goldman Sachs estimate of current gap at around 10% of GDP Too much less dangerous than too little

JFMAMJJASOND NAHB Housing Market Index – Builder Confidence Source: Builders' Economic Council (BEC) Monthly Surveys