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Report

Unemployment Insurance and Fiscal Stimulus

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Sticking to the Principles

In previous papers, we have delineated principles for judging the stimulative impact of tax proposals and then applied those principles to recent tax proposals.

According to these principles, any tax cut should be temporary, have a significant stimulative bang for the buck, and avoid long-term damage to the nation’s fiscal position.

These same tests should be applied to spending proposals included in any stimulus package. Indeed, if anything, recent economic releases have underscored the importance of the principles. To be sure, output fell during the third quarter of 2001 and employment declined substantially in October, highlighting the benefits of a timely stimulus package. But according to professional forecasters, the slowdown is expected to be temporary—with the economy recovering sometime next year.

The expectations of professional forecasters, of course, can be wrong, but they are the best we have at this point. They strongly suggest that any stimulus should be focused on the next six to nine months, when the economy most needs the assistance….

We thank David Gunter and Jeegar Kakkad for excellent research assistance.

Authors

Peter R. Orszag

Vice Chairman of Investment Banking, Managing Director, and Global Co-Head of Healthcare - Lazard

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