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6. On the fiscal side, we hope that Congress passes the extension of emergency unemployment insurance, continued aid to state and local governments, and at least a temporary extension of the bulk of the 2001/2003 tax cuts beyond the end of 2010. If some of the tax cuts are left to expire, then this should be offset by temporary fiscal easing elsewhere. The point is that a tightening of the overall fiscal stance at a time when the economy is already struggling to maintain the current, unacceptably low level of resource utilization is a bad idea. In fact, we favor additional deficit-financed stimulus, coupled with a commitment to cut the longer-term deficit more aggressively than currently envisaged in the administration's 10-year plan. The consolidation could include cuts in discretionary expenditures, slower growth in entitlement spending, and gradual hikes in both direct and indirect taxes. The precise mix is a matter of political preferences, and reasonable people can disagree about the pros and cons of different measures. But the need for long-term budget restraint should not stand in the way of a near-term boost when the economy clearly needs it.
7. A failure to enact additional stimulus-at a minimum, extended unemployment benefits, state fiscal assistance, and extension of the bulk of the 2001/2003 tax cuts-would imply a downside risk to our GDP and employment forecasts, specifically for 2011. Right now, we are showing a gradual reacceleration to 3% on a Q4/Q4 basis in 2011, but we worry that this might end up being too optimistic. We will evaluate developments both on the policy front and in the US economic data closely over the next few weeks to see whether any adjustments are warranted.
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Jan Hatzius Chief US Economist Goldman, Sachs & Co.