Stimulus Math
| Mon Nov. 10, 2008 10:11 PM PST
STIMULUS MATH....Goldman Sachs says we're about to suffer the deepest recession since World War II, with unemployment expected to top 8.5% next year and maybe inching a little higher in 2010. So how big should a stimulus package be given the size of the economic tsunami we're headed into? Paul Krugman tells us today that since Okun's Law suggests that every point of unemployment above 5% represents a 2% output gap, an 8.5% unemployment rate means that the economy is performing 7% under its potential:
So we need a fiscal stimulus big enough to close a 7% output gap. Remember, if the stimulus is too big, it does much less harm than if it's too small. What's the multiplier? Better, we hope, than on the early-2008 package. But you'd be hard pressed to argue for an overall multiplier as high as 2.
When I put all this together, I conclude that the stimulus package should be at least 4% of GDP, or $600 billion.
Given the likely length of this recession, we'll probably need nearly this much again in 2010. Call it an even trillion bucks when it's all said and done.
As recently as a few months ago that would have seemed unimaginably large to me. Today, not so much. Stimulate away, President Obama.
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Scary, but it sounds like the right order of magnitude, which is scary indeed. Of course even without new programs, or tax cuts, the deficit would increase by a pretty big fraction of that, so I don't think its time to start drooling about the opportunity to get gazillions for our own pet cause.
I sure hope we are smart enough to spend the bulk on infrastructure that will help with our energy and carbon problems. Better to kill three birds with one stone, than serially three birds with three stones.
an 8.5% unemployment rate means that the economy is performing 7% under its potential... So we need a fiscal stimulus big enough to close a 7% output gap
If we are trying to fill an output gap caused by unemployment, it would seem that the most effective (and fair?) way to do it would be to give the entire stimulus to the unemployed. They need it most, and they are the ones most likely to spend it immediately. Or is that socialism?
Submitted by Frank Wilhoit (not verified) on Tue Nov. 11, 2008 4:17 AM PST.
Kevin,
Don't degrade yourself by doing math based on cooked numbers. Okun's Law wasn't formulated against politically distorted input, it was formulated against real input. You can get any algorithm to give you any result at all if you give it funny numbers.
Stimulus Math or "Occams Razor?" Everyone is getting Bailed Out except the Auto Industry, Trucking Industry, and other major job creators! Lets put a windfall Tax on the Oil Industry to retool the Auto Industry that the Oil Industry put out of Business! Forget Math-Try Justice!
As we go forward let us not ever forget that this is a failure, repeat failure of unfettered business.
Amazingly while this is by far the worst episode, it's not the first. We ignored the message of previous deregulation crises--the S and L crisis, Enron, etc.
We need accountability. The icons of the republican revival in the 70's and 80's, Milton Friedman and Reagan were terribly wrong. Deregulation is a dead end track. The republican party, with some help from democrats, led us into the current armageddon. Congratulations.
Um, I'm a good liberal and all, and not philosophically opposed to debt and deficit spending, especially in a recession, but does anyone else see the problem here? We got to this point by spending too much money we don't actually have, and the proposed solution is to spend even more money we don't have? It's starting to sound suspiciously like the "tax cuts solve every problem" mantra from the right. If the only tool you have is a hammer (in this case, borrow and spend), then every problem starts to look like a nail.
Doktorwise, deficit spending is by definition spending money that you don't have, that's why you borrow it.
The U.S. is far away from the point where it can't pay back its debt. Its debt to GDP ratio is below that of Japan, France, Belgium, Germany, etc. Not bad company to be in.
The only responsible course right now is to engage in a massive deficit spending. The challenge will be to run surpluses once times get better.
g. powell,
I do understand the concept of deficit spending, I'm guess that I'm just concerned that we might be reaching a tipping point in the west (especially, as you point out, in places like Japan and Europe) where there is so much debt that our creditors start to doubt our ability to pay it back. You may be satisfied that we're "no where near" that point, but I'm guessing no one owes you a trillion bucks, either. Confidence in our ability to pay is not a simple mathematical calculation, doubt and fear are human calculations. That said, it's not like I've got any great alternatives to offer. I just want to make sure that we explore all the possible approaches.
The problem isn't that we spent too much money, doktor. The problem is that we spent too much money to blow things up in other countries for plainly ideological purposes, with no return on investment. Spending money on a bomb is a lot different than spending money on a bridge (even to nowhere). The former is blown up and its value destroyed, as well as whatever valuable target it was aimed at.
The bridge remains, helping people transport themselves, creating economic opportunity, as well as retaining the value of the bridge itself.
Same goes for roads, schools, parks, public spaces, subways, trains, and any other public investment in infrastructure.
The later should always take precedence in access to public money as they offer the best return on investment and there is no efficient private way to fund their development.
War has disastrous effects for the wealth of the middle class, especially wars of no purpose or end.
How about the people who's interest the wars we fight do serve take up a private collection to fund them, next time?
The job of the modern government, it seems, is to be the bigger fool for the stockmarket.
Posted by: Jet on 11/11/08
Does that mean the next Treasurer will have to wear one of those funny jester hats?
As to deficit spending to solve problems caused by too much spending: bad mortgages and a housing price balloon weren't caused by so many irresponsible individuals as by criminal politicians and financial firms who rigged the game to make lots of money for real estate brokers (who sold houses for big fees), mortgage companies (who loaned money and then passed that on in CDOs to others) and others to make a killing. It's a big scam.
So, the economy is tanking and we must use whatever tools we need, including deficit spending.
Also, dropping oil prices will take some pressure off people's wallets unless the sadistic creeps decide to push it back up to hurt us some more.
Yeah, I don't mind a 600 billion or even a 600 trillion dollar fiscal stimulus as long as it is spread proportionately based on taxes paid. Some of us who worked hard and were responsible were screwed so far because we got little or no part of the first fiscal stimulus and are getting no part of the homeowner and bank bailouts. Where's the incentive for busting your ass and paying all your taxes and for being very responsible with your loans and investments?
Victoria Cochrane writes for
Submitted by jewelry stores (not verified) on Sat Aug. 15, 2009 1:28 AM PDT.
Victoria Cochrane writes for a digital marketing agency. This article has been commissioned by a client of said agency. This article is not designed to promote, but should be considered professional content.
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