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What more can be done?
The short answer is nothing.

Only luck can save America’s economy
What more can be done? The short answer is nothing.
The policy options have narrowed almost to zero.
Clive Crook, Financial Times August 3 2008

The White House just updated its budget forecasts for next year. These pencil in a deficit of nearly $500bn. This excludes roughly $80bn of war costs. It also makes incomplete allowance for the fiscal component of the various housing-related bail-outs now in train. If Freddie Mac and Fannie Mae, the housing agencies, are forced to draw on the full support that the Treasury, with the passage of the new housing bill, is empowered to provide, add tens of billions more. A deficit of 5 per cent of gross domestic product next year is within reach.

Budget deficits should indeed rise sharply in recessions. In the US, this requires more forceful intervention than in most European countries. Automatic fiscal stabilisers are less powerful in the US: the government is smaller, and the tax base (lacking a value-added tax or equivalent) is less cyclically sensitive. States have to comply with semi-binding balanced budget rules as well, which perversely tighten fiscal policy during recessions. California, in the midst of the current slowdown, has been forced to sack thousands of workers and put state employees on the minimum wage.

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