I have a lot of respect for Professor Pollin. He is the co-founder of the Political Economy Research Institute and a long-time advocate for working Americans. He is the author of Contours of Descent, a good book about the US economy during the 1990s. (Click here for a review I wrote of the book). Nonetheless I must differ with him that a stimulus of the kind and magnitude he offers will end the recession. (In the article, he calls for a stimulus of $300 bil, so that has been enthusiastically exceeded by the Obama Administration)
The recession will continue until all the disastrous business blunders that accumulated during the distortions of the boom years have been purged.
During a credit-fueled boom like the one we've just observed, the economy accumulates investment mistakes, due to the patterns that emerge that look sustainable but are not. For example, due to the easing of lending standards, the rate of homeownership rose from about 65% to nearly 70%. Millions more people owned homes than before. That incredible rise in real estate buying and selling fueled a boom in home construction. It is now abundantly clear that many of the new homeowners should not have purchased their homes. They did not have the income to purchase the home they did at that price.
All the economic activity that grew up around booming home prices now must be directed toward other ends. The number of realtors, which increased 50% (thanks to the Political Calculations blog for a nice analysis) from 2001 to 2006, must return to historical levels. Home construction must fall. Home prices must fall until they reach a level of historical affordability.
The reality is that an economic stimulus of $300 bil such as what Professor Pollin proposed, or the more ambitious version that the Obama Administration created will not encourage the kind of restructuring to which I refer above. Instead it will slow down the necessary adjustment, and add inflationary pressure to the mix.
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