Judging the Stimulus

Robert Barro is unimpressed with the fiscal stimulus. He says an extra $600 billion of public spending at the cost of $900 billion in private spending was not a good deal.

The path of incremental government outlays over the five years in billions of dollars is +300, +300, 0, 0, 0, which adds up to +600. The path for GDP is +120, +180, +60, minus 330, minus 330, adding up to minus 300. GDP falls overall because the famous "balanced-budget multiplier"--the response of GDP when government spending and taxes rise together--is negative. This result accords with the familiar pattern whereby countries with larger public sectors tend to grow slower over the long term.

The projected effect on other parts of GDP (consumer expenditure, private investment, net exports) is minus 180, minus 120, +60, minus 330, minus 330, which adds up to minus 900. Thus, viewed over five years, the fiscal stimulus package is a way to get an extra $600 billion of public spending at the cost of $900 billion in private expenditure. This is a bad deal.

See Gary Burtless's response on National Journal's economic experts blog.

I am puzzled by his Wall Street Journal analysis, which seems to treat the stimulus package as though it consists solely of an increase in government spending. In fact, at least 45% of the stimulus in 2009 and 2010 consists of tax reductions rather than spending increases. Moreover, as I have argued elsewhere, the part of the stimulus package that has provided fiscal relief to state governments has resulted in reductions in state taxes below where they would have been without the stimulus Thus, more than half of the stimulus package consists of tax reductions rather than government spending increases. It is very hard for me to believe that these tax reductions have failed to spur an increase in household consumption, contrary to Barro's apparent view that personal consumption has declined as a result of the stimulus.

Presented by

Never Tell People How Old They Look

Age discrimination affects us all. Who cares about youth? James Hamblin turns to his colleague Jeffrey Goldberg for advice.

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register.

blog comments powered by Disqus

Video

Never Tell People How Old They Look

Age discrimination affects us all. James Hamblin turns to a colleague for advice.

Video

Would You Live in a Treehouse?

A treehouse can be an ideal office space, vacation rental, and way of reconnecting with your youth.

Video

Pittsburgh: 'Better Than You Thought'

How Steel City became a bikeable, walkable paradise

Video

A Four-Dimensional Tour of Boston

In this groundbreaking video, time moves at multiple speeds within a single frame.

Video

Who Made Pop Music So Repetitive? You Did.

If pop music is too homogenous, that's because listeners want it that way.

More in Business

Just In