IMF Calls for Large Stimulus Package
The International Monetary Fund urged governments around the world to make large, but carefully designed stimulus packages to help pull the global economy out of a recession. In a research paper, the IMF said across-the-board tax cuts or bailouts of auto or other troubled industries are likely to waste money. IMF chief economist Olivier Blanchard backed president-elect Barack Obama’s $675 to $775 billion stimulus plan and approach of using targeted tax cuts:
“The current crisis calls for two main sets of policy measures. First, measures to repair the financial system. Second, measures to increase demand and restore confidence. While some
of these measures overlap, the focus of this note is on the second set of policies, and more specifically, given the limited room for monetary policy, on fiscal policy.
“The optimal fiscal package should be timely, large, lasting, diversified, contingent, collective, and sustainable: timely, because the need for action is immediate; large, because the current and expected decrease in private demand is exceptionally large; lasting because the downturn will last for some time; diversified because of the unusual degree of uncertainty associated with any single measure; contingent, because the need to reduce the perceived probability of another “Great Depression” requires a commitment to do more, if needed; collective, since each country that has fiscal space should contribute; and sustainable, so as not to lead to a debt explosion and adverse reactions of financial markets. Looking at the content of the fiscal package, in the current circumstances, spending increases, and targeted tax cuts and transfers, are likely to have the highest multipliers. General tax cuts or subsidies, either for consumers or for firms, are likely to have lower multipliers.”
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