Monday, September 20, 2010

When is a Stimulus Like a Boat?

In an earlier post I reported Christine Romer predicted that the stimulus package would add 1.6% GDP to the economy.  So, let’s have some fun with her prediction. 

When the stimulus bill was passed, the economy was $14,050 B and it has grown to $14,575 B over a year and a half, a difference of $525 B.  Now in the same period of time the Federal Government has spent $512 B of the $787 B in the stimulus bill.  So, what can we conclude?  The stimulus caused the economy to expand by $13 B beyond the stimulus itself?  At 3%, that only covers the first year’s interest on the money borrowed for the stimulus. 

Let’s keep Christine’s Romer’s 1.6% expansion in mind.  We should have grown by $225B more than the stimulus.  But not all of our growth can be attributed to the stimulus.  Let’s assume that half of the $525B is the product of our individual private labor and companies.  Also, we must give some credit to Ben Bernecke and the Federal Reserve’s expansionary money supply policies.  Then we are getting about a 50% return on the dollar from the stimulus. 

Annualized we are growing at something like 2% per year when we should be getting 5-6% in the initial phase coming out of a recession.  We shouldn’t be threatened with slipping back into a second recession.  In Keynesian terms, the multiplier effect of the stimulus is between .5 and 1 when it should be between 2 and 3.

President Obama wants to add $50B for transportation improvements, and he does not want to call it a stimulus.

When I thought about this post, I thought of some very clever things to say, but now that I laid out this information, I think I’ll stop writing.

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