Enablers of the Housing Bubble
Mark Thoma on the Need for More Economic Stimulus

The New York Times Editorial Board Understands Macro

Unlike vote 60--or even vote 50--in the senate, and unlike every single congressional republican, they have a clue:

The Case for More Stimulus: Corporate profitability has been boosted by job cuts, pay cuts and a drive to restock depleted inventories. Immense federal stimulus has jolted the economy. But what happens when those measures run their course? The economy is going to need more government support, or it is bound to be very weak for a very long time — and vulnerable to a relapse into recession. Unemployment is expected to worsen well into next year, exceeding 10 percent. Foreclosures are expected to rise, which will push home values down further. Hundreds of small and midsize banks are likely to fail in coming years. State and local governments face budget shortfalls in 2010 that are as bad or worse than this year’s.

Yet Washington is not providing a coherent plan for effective stimulus.... Congressional Republicans say continued economic weakness is proof that February’s stimulus package failed. Lawmakers in both parties fret that large budget deficits preclude more stimulus.... Both arguments are wrong.... [T]he immediate need for stimulus trumps the longer-term need for deficit reduction....

Congress and the administration should agree on ways to ease the dire financial condition of the states. Most important is continued aid for state Medicaid programs, which would ensure vital services, support jobs and free up money for other needs. Governors will begin to prepare their new budgets in early 2010, and those budgets will be in effect for a year, starting in July....

Without another round of effective stimulus, the worst recession in modern memory will likely become — at best — the weakest recovery in modern memory. Another boost to federal spending that is targeted and timely should not be too much for politicians to deliver.