The widely followed National Association of Purchasing Managers survey index, for example, is in a range that in the past has always signaled negative economic growth for the economy as a whole. If a few quarters of negative growth are strung together, then we will be in recession and many will experience painful disruptions to their lives. If the recession is typical, for example, roughly 3 million Americans will lose their jobs. While it is impossible to know with certainty whether a recession is near, one thing is extremely clear. Fiscal policy, which is racking up large surpluses, is tighter now than it has ever been this close to a recession.
Bad medicine can make a sick patient worse.
There is a significant risk that tight fiscal policy will be the influence, at the margin, that pushes the economy into recession, or a key factor making a recession worse. Currently, it is forecast to be more than twice that high. There is no question that fiscal policy can help lower the risks of a repeat of that experience. While the theoretical response of the economy to a tax cut depends on monetary policy as well, macroeconomists who have analyzed the history of U.S. tax policy have generally found that the stimulus associated with a tax cut is from one to two times the size of the cut. Accordingly, if the President's plan were accelerated into this year, we could expect GDP to be higher, all else equal, by about 1 percentage point, with the effect taking from 5 to 7 quarters from the passage of the bill to run its course.