U.S. policy-makers should think twice before pursuing a second economic stimulus package given recent indications of recovery, two top economists said on Saturday.
That's even though history shows that officials erred by under-stimulating economies in two major crises of the last century -- the Great Depression and Japan's Lost Decade.
According to Alan Auerbach of the University of California at Berkeley and William Gale of the Brookings Institution, a Washington-based think tank, any second effort now may be aimed at an economy already turning the corner.
The U.S. economy is showing signs of recovery, and the addition of another stimulus package at this point could turn out to be poorly timed, Auerbach and Gale concluded in a paper presented to top policy-makers and academics gathered for a Federal Reserve-sponsored conference.
The U.S. Congress approved a $787 billion package of tax cuts and government spending in mid-February to combat a recession that was already appearing unusually severe.
While arguing further fiscal support for the economy would be misguided, Auerbach and Gale said the extraordinary measure put in place in the recent crisis was appropriate, even if some elements were not as well-targeted as they could have been.
It is fair to say that if a fiscal stimulus were ever considered appropriate, the beginning of 2009 was such a time, they wrote.
Gale and Auerbach said a stimulus package at a time when several million jobs had been lost, fears of potentially crippling deflation were growing, interest rates had already hit zero and the entire world was in recession carried much smaller risks than the lack of one would have.
Some analysts and lawmakers worry that the sharp widening in the U.S. budget deficit will lead to inflation. The White House forecasts a deficit of $1.8 trillion this year, which at 12.9 percent of GDP would be the largest since World War II.
But the researchers noted that in the Great Depression and Japan's Lost Decade in the 1990s policy-makers did not attempt to fight the downturns with a sustained fiscal expansion -- possibly due to putting concerns about the budget ahead of worries about the economy.
At the very least, one conclusion would be that attempts to balance the budget during those episodes did not succeed in either balancing the budget ... or in avoiding a prolonged, severe downturn, they wrote.
The authors said that while this year's U.S. stimulus package may not have been as well-targeted as it could have been, there was some logic to its structure.
The tax cuts could have been designed more effectively, they said, but the aid to states was well-advised and the aid to individuals was based on humanitarian needs.
They said it was unclear whether the package would remain temporary. Most of it is due to expire in 2011 but the government will likely face political pressure to keep certain features in place beyond that.