Quote Originally Posted by dragonrider
I think some kind ot stimulus may be needed, but not sure about that size --- $500 billion to $1 trillion seems HUGE!

I am more concerned about what FORM the package might take. Personally, I dislike these cash-giveaway rebates where the government just mails out checks. That seems stupid. I guess the idea is that it provides a more immediate shot in the arm than other forms of spending. But as long as we are going to be borrowing the money, we should use it in a way that creates jobs here and in which we get an actual thing of value out of the deal, like infrastructure. Rather than just cutting checks to everyone, if we used an equivalent amount of money to build or fix roads, bridges, schools and hospitals, the money would still go into the economy, but it would be spent in a way that would definitely creat American jobs, and we would also get those roads, bridges, schools and hospitals. If we just mail out checks, that money is far more likely to just go to consumer goods that stand a very good chance of being made in other countries --- it is not guaranteed to create jobs here, and there is no great lasting benefit to this country. I'd rather get a new bridge than for everyone to get a new Wii.
A few things to note: I am very pro market orientated, but a stimulus is gong to happen because all developed economies are conditioned to this type of response to a recessionary gap.

In theory, a stimulus package is to be used to shore up a recessionary gap when growth outlooks are dismal. In theory, government spending stimululs will produce a greater short run growth effect due to the leakages that arise having an income effect, When tax rebates were given a larger than normal portion was put towards savings (paying off debt), which is a leakage that created a tiny income effect. The money people did spend went partly to foreign made goods (a leakage that had no income effect).

Direct spending from the federal government woud instead go to agencies (leakage) who will appropriate funding needed for roads, bridges, upgrades, education, grants, health care, etc..., as funds are transfered to firms will partake on the productin of these programs, For example, if there was a $1 trillion stimulus, and 5% leakage, step one (fund appropriatin) would lead to an income effect of $950 billion. Firms would be flush with cash, and soon that money would trickle into further spending of labor, material purchase, R&D, etc (step 2)...,

From this point further, it is refered to the steps "to infinity", The important idea is not to undershoot when attempting to close a recessionary gap otherwise it will have less steps generating income, and still negative growth would occur. A $1 trillion stimulus package based on government spending would most likely lead to an inflationary gap, which can now be very easily corrected because interest rates are so low, and a large raise in rates will seem like nothig as they are currently just above zero.

Depending on the percentage of domestic goods Americans consume, a trillion dollar stimulus can have multiplier effect. For example, if the US consumed 50% US goods, a $1 trillion dollar stimulus of which i described, would lead to $2 trillion dollars in GDP growth.

Remember, in a market orientated world, this would not be necessary, as the corection would be short lived.