But the key thing to bear in mind is that the stimulus effect is a one-time rise in the level of activity, not an ongoing change in the rate of growth. While the one-time increase will appear in official statistics as a temporary rise in the growth rate, there is nothing to make that higher growth rate continue in the following quarters. So, by the end of the year, we will see a slightly improved level of GDP, but the rate of GDP growth is likely to return to negative territory.
The positive effect of the stimulus package is simply not large enough to offset the negative impact of dramatically lower household wealth, declines in residential construction, a dysfunctional banking system that does not increase credit creation and the downward spiral of house prices. The Obama administration has developed policies to counter these negative effects, but, in my judgment, they are not adequate to turn the economy around and produce a sustained recovery.
Having said that, these policies are still works in progress. If they are strengthened in the months ahead — to increase demand, fix the banking system and stop the fall in house prices — we can hope to see a sustained recovery start next year. If not, we will just have to keep waiting and hoping.
Martin Feldstein, a professor of economics at Harvard, was chairman of former US president Ronald Reagan’s Council of Economic Advisors and president of the National Bureau for Economic Research.
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