FacebookTwitterGoogle+RedditEmail

Stimulus Arithmetic

When her husband was in the oval office Laura Bush launched an initiative to promote literacy across the country. Unfortunately, there was no comparable effort to promote numeracy in our nation’s capital. This has been evident in the discussion of the stimulus among politicians and commentators in the week since the June job numbers were released.

Republicans were anxious to pronounce the stimulus a failure, while Democrats insisted that the package just needed more time, pointing out that most of the money had not yet been spent. Neither assertion can withstand the test of third grade arithmetic.

The basic story is that the stimulus was too small, pure and simple. It would have been too small even if the Obama’s administration’s projections for the severity of the recession had proven accurate. However, since the downturn is considerably steeper than they had projected, the inadequacy of the stimulus is even greater.

Here are the numbers. The unemployment rate is currently 9.5 percent and virtually certain to cross 10.0 percent by the end of the summer. It is likely to hit 11.0 percent early next year, but we’ll just work off the 10.0 percent figure.

The target for unemployment should be no higher than 5.0 percent. (The year-round average for unemployment in 2000 was 4.0 percent.) This leaves a gap between actual unemployment and our employment target of 5 percentage points. As a rule of thumb, it takes a 2 percentage points increase in GDP to reduce the unemployment rate by 1 percentage point. This means that in order to reach our target of 5 percent unemployment, we would have to increase GDP by 10 percent, or $1.5 trillion.

Different types of stimulus have different multiplier effects. One dollar of addition spending is generally estimated to have a multiplier effect in the neighborhood of 1.5, meaning that for every dollar we spend on a government project, we increase GDP by $1.50 as the people we hire go out and spend their paychecks, creating new demand.

The multiplier effect on tax cuts is generally estimated as being in the neighborhood of 0.9, or less. This means that $1 of tax cuts will end up increasing GDP by about 90 cents. Unlike spending on things like road construction or health care, a tax cut does not directly generate demand. It only generates demand when people go out and spend their tax cuts. Since much of any tax cut will be saved, the stimulus effect of tax cuts is almost always less than the effect of direct spending.

Okay, if we have an annual GDP shortfall of $1.5 trillion and we decided to fill it by spending, then we would need approximately $1 trillion per year of additional spending. Alternatively, if we tried to fill the gap with tax cuts, we would need $1.65 trillion per year in tax cuts. After pulling out spending for later years, and the alternative minimum tax fix, the Obama package provides about $300 billion a year in stimulus. This is obviously inadequate.

When the Republicans jump on the June jobs numbers and say that stimulus doesn’t work, it is like the obese person complaining that dieting and exercise don’t work because he is still overweight after passing up dessert and taking a walk around the block. There is a question of magnitude here that they seem to have missed.

The “give it time” crew don’t fare too much better. While only about 15 percent of the stimulus has gone out the door thus far, it is the rate of spending that matters.

To put this point simply, suppose that we would spend the $600 billion 2-year stimulus at the rate of $25 billion a month. Assume that we have ramped up to this spending rate, so that by May we have reached the $25 billion rate of monthly spending. While it may be true that at the end of June that we have only spent 15 percent of the stimulus, the rate of spending will not be increasing substantially from current levels. This means that whatever boost to monthly consumption and output we expect from the stimulus, we are now currently seeing. This boost will continue through 2010, but we will not get an additional boost from the stimulus further down the road.

The actual story of stimulus spending is somewhat more complicated, but this simple story captures the basic picture. The additional boost from new projects that are yet to be started will not make a big dent in the economic picture.

In short, we badly need another very big dose of stimulus. Unfortunately, the politicians and pundits in Washington are either too ignorant, dishonest, or scared to talk about the $2 plus trillion stimulus that this economy needs. As a result, tens of millions of people will lose their jobs and/or their homes because of continued economic mismanagement. In economic policy circles, mismanagement is a job qualification, not a fault.

DEAN BAKER is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy.

This column was originally published by The Guardian.

 

 

 

 

 

 

 

 

More articles by:

Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC. 

February 19, 2019
Richard Falk – Daniel Falcone
Troublesome Possibilities: The Left and Tulsi Gabbard
Patrick Cockburn
She Didn’t Start the Fire: Why Attack the ISIS Bride?
Evaggelos Vallianatos
Literature and Theater During War: Why Euripides Still Matters
Maximilian Werner
The Night of Terror: Wyoming Game and Fish’s Latest Attempt to Close the Book on the Mark Uptain Tragedy
Conn Hallinan
Erdogan is Destined for Another Rebuke in Turkey
Nyla Ali Khan
Politics of Jammu and Kashmir: The Only Viable Way is Forward
Mark Ashwill
On the Outside Looking In: an American in Vietnam
Joyce Nelson
Sir Richard Branson’s Venezuelan-Border PR Stunt
Ron Jacobs
Day of Remembrance and the Music of Anthony Brown        
Cesar Chelala
Women’s Critical Role in Saving the Environment
February 18, 2019
Paul Street
31 Actual National Emergencies
Robert Fisk
What Happened to the Remains of Khashoggi’s Predecessor?
David Mattson
When Grizzly Bears Go Bad: Constructions of Victimhood and Blame
Julian Vigo
USMCA’s Outsourcing of Free Speech to Big Tech
George Wuerthner
How the BLM Serves the West’s Welfare Ranchers
Christopher Fons
The Crimes of Elliot Abrams
Thomas Knapp
The First Rule of AIPAC Is: You Do Not Talk about AIPAC
Mitchel Cohen
A Tale of Two Citations: Rachel Carson’s “Silent Spring” and Michael Harrington’s “The Other America”
Jake Johnston
Haiti and the Collapse of a Political and Economic System
Dave Lindorff
It’s Not Just Trump and the Republicans
Laura Flanders
An End to Amazon’s Two-Bit Romance. No Low-Rent Rendezvous.
Patrick Walker
Venezuelan Coup Democrats Vomit on Green New Deal
Natalie Dowzicky
The Millennial Generation Will Tear Down Trump’s Wall
Nick Licata
Of Stress and Inequality
Joseph G. Ramsey
Waking Up on President’s Day During the Reign of Donald Trump
Elliot Sperber
Greater Than Food
Weekend Edition
February 15, 2019
Friday - Sunday
Matthew Hoh
Time for Peace in Afghanistan and an End to the Lies
Chris Floyd
Pence and the Benjamins: An Eternity of Anti-Semitism
Rob Urie
The Green New Deal, Capitalism and the State
Jim Kavanagh
The Siege of Venezuela and the Travails of Empire
Paul Street
Someone Needs to Teach These As$#oles a Lesson
Andrew Levine
World Historical Donald: Unwitting and Unwilling Author of The Green New Deal
Jeffrey St. Clair
Roaming Charges: Third Rail-Roaded
Eric Draitser
Impacts of Exploding US Oil Production on Climate and Foreign Policy
Ron Jacobs
Maduro, Guaidó and American Exceptionalism
John Laforge
Nuclear Power Can’t Survive, Much Less Slow Climate Disruption
Joyce Nelson
Venezuela & The Mighty Wurlitzer
Jonathan Cook
In Hebron, Israel Removes the Last Restraint on Its Settlers’ Reign of Terror
Ramzy Baroud
Enough Western Meddling and Interventions: Let the Venezuelan People Decide
Robert Fantina
Congress, Israel and the Politics of “Righteous Indignation”
Dave Lindorff
Using Students, Teachers, Journalists and other Professionals as Spies Puts Everyone in Jeopardy
Kathy Kelly
What it Really Takes to Secure Peace in Afghanistan
Brian Cloughley
In Libya, “We Came, We Saw, He Died.” Now, Maduro?
Nicky Reid
The Councils Before Maduro!
Gary Leupp
“It’s All About the Benjamins, Baby”
FacebookTwitterGoogle+RedditEmail