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Economists Back Stimulus Bill of up to $450 Billion

By John Reichard, CQ HealthBeat Editor

October 30, 2008 -- If a larger economic stimulus package bodes well for a temporary increase in federal Medicaid spending, boosters of such an increase could take heart from the testimony of two of the three economists who testified at a Joint Economic Committee hearing Thursday.

Congressional leaders haven't fixed the size of a new economic stimulus package they may take up this year after the Nov. 4 elections. However, leaders in both chambers have said they are interested in a package in the $150 billion range, which is expected to include relief for the states including a temporary hike in federal Medicaid funding.

That's not big enough, two economists told the hearing, while a third said it would be better to hold off on any added stimulus until after other government measures have been given a chance to work.

New York University economics professor Nouriel Roubini told lawmakers at the hearing that a fiscal stimulus of at least $300 billion and possibly as high as $400 billion should become law—quickly.

"This is the worst financial crisis that the U.S. and other advanced economies have experienced since the Great Depression," Roubini testified. Noting a slump in private sector spending, Roubini said private demand "is in free fall."

Given a projected sharp contraction in demand—of about $450 billion in 2009 compared with 2008—fiscal stimulus of at least $300 billion and possibly as large as $400 billion is needed as compensation, Roubini said.

He added that "a stimulus package legislated only in February or March of next year when the new Congress comes back will be too late as the contraction of private aggregate demand will be extremely sharp in the next few months."

But Rep. Kevin Brady, R-Texas, questioned the potential effectiveness of a new stimulus package.

"The question now is not how many more financial pills we can stuff down the market's throat, but how effectively they are administered and given time to work," he said. Brady added that there is already "ample evidence" that a new stimulus package "will become a Christmas Tree of pet congressional projects, from Amtrak to Medicaid, adorned with financial handouts to local and state governments whose spending has outpaced even that of Congress...."

The economists testifying at the hearing basically agreed that a recession has begun and the economic conditions will deteriorate further. In the third quarter of 2008, the inflation-adjusted Gross Domestic Product "decreased 0.3 percent at an annual rate," testified J. Steven Landefeld, director of the Bureau of Economic Analysis at the U.S. Department of Commerce. By comparison, inflation-adjusted GDP grew by 2.8 percent in the second quarter of this year, Landefeld said. The third quarter figures were based on "advanced estimates" of GDP.

Consumer spending dropped 3.1 percent in the third quarter, the largest such decrease since the second quarter of 1980.

Simon Johnson, professor of entrepreneurship at the Massachusetts Institute of Technology, told the joint House-Senate committee that a total fiscal stimulus of around $450 billion would be appropriate, "with about half front-loaded in the first three quarters of 2009, when there will likely be recession, and the rest following over the next 8–12 quarters, during which otherwise growth will be slow."

Johnson said in his written testimony that "I think we should think about a world in which the U.S. recession will last 4–5 quarters, with a trough at negative 2–3 percent GDP growth (annual rate), followed by 8–12 quarters of slow growth."

Johnson said near-term spending should include direct aid to state and local governments, in part because it would replace money cut from existing programs, which "can have a very rapid effect, without the need to design new programs."

Roubini similarly urged "a massive direct government fiscal stimulus that includes public works, infrastructure spending, unemployment benefits, tax rebates to lower-income households, and provision of grants to cash-strapped local governments."

But economist Richard Vedder, a fellow at the American Enterprise Institute, counseled against moving too quickly, saying that a stimulus package of $300 to $450 billion would lead to a decline in confidence and "soaring inflationary expectations."

"I would urge you not to panic," Vedder told lawmakers, noting the series of aggressive measures already taken by the federal government to intervene in the economy. He counseled waiting a month or two to allow "the healing effects of the market" to occur.

Vincent DeMarco, president of the Maryland Citizens' Health Initiative, urged Congress to temporarily increase federal Medicaid payments to preserve what he said was a badly needed expansion of Medicaid coverage to low-income uninsured state residents. Because of the expansion, "in just three months, over 16,000 uninsured Marylanders have signed up for coverage, demonstrating the great need for this expansion," DeMarco said.

"We know that many of the people who would be hurt if Maryland's new Medicaid expansion is curtailed are in particular need of health care coverage now because of the economic downturn," DeMarco said. Also in jeopardy is Maryland state funding to ensure that children in Medicaid get dental care, he added. The funding "will prevent the kind of tragedy that occurred a couple of years ago when a young boy in Prince George's County died because he did not get proper dental care," DeMarco said.

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