Obama's stimulus plan helps stop economic decline, says U.S. economist

15:55, February 20, 2010      

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U.S. President Obama's stimulus plan has worked because it slows the momentum from going down and stops the rate of economic decline, a U.S. economist said in an interview with Xinhua here on Friday.

"Otherwise what would have been the alternatives?" asked David Mirza, an associate professor at the Department of Economics at Loyola University in Chicago. He said, "If you have the momentum on the down side, and if you can slow it from going down and stop the rate of decline by the stimulus plan, then it is successful, then eventually the economy will recover."

Although the economy has not really recovered yet, but Mirza believes that it is showing signs of recovery now. However, one year of time is too soon to measure the actual effectiveness of the stimulus plan.

The economist further explained, "Physical policy, that is government spending in this case, usually has a delayed effect on economy -- you have to first recognize the problem, then you have to decide what to do with it and it all takes time. It is a political solution as well as an economic solution. You have to have the political decision where to spend the money, and the battle has to occur in the Congress."

In general, Mirza thinks there is a leg of six months to one year for the stimulus to really have a major effect. However, Mirza considers injecting money into the banking system as a relatively quicker fix. Unfortunately the stimulus money given to the banks is not as successful as it should have been.

He pointed out, "The problem is that the banks were in trouble and they took the stimulus money to simply write their books financially. Also banks are humans who just had their hands burned on lending too much money. Now they are gone to the other extreme of being fearful of lending money. It is really a problem of psychology -- if you get burned, you will be more careful. They are probably too careful right now!"

Nevertheless, the government is trying to push the banks to increase leading but we will need to wait and see when the banks begin to lend money, he added.

Regarding government's actions to stimulate the economy, Mirza suggested that the government should give tax breaks to companies that can increase productivity in the economy and also increase spending as well.

"There are various ways that government can push the economy along this way but they have not started really doing this in earnest. I assume they did not anticipate that the banks did not come through lending money as they should have."

In terms of the next step forward with the stimulus plan, Mirza said, "Definitely they are on the right track and the government is going to have to continue with this stimulus for some time. They might reduce the amount and the rate they are spending money, but if they eliminate it right now it is like pulling the rug under the economy. Then we will have a problem."

Using a historical event as an analogy, the economist said that this is the type of problem we had at the Great Depression in 1936. U.S. President Roosevelt did not like the idea of deficit spending and so he reduced it. Then the economy immediately went into a tail spin and then he said we just have to go back to deficit spending again.

In addition, Mirza said, "We probably will add more money but there is still a lot of money that have not been spent yet. So the government needs to be careful that it doesn't stimulate the economy too much because then we will fear inflation."

Source: Xinhua
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