How Big a Stimulus Did We Need?

Paul Krugman writes:

But the stimulus wasn't nearly big enough to restore full employment -- as I warned from the beginning. And it was set up to fade out in the second half of 2010.

I've heard this complaint from a number of commentators, and it always surprises me.  Did anyone think we were going to get a stimulus big enough to restore full employment?

How much unemployment reduction you get for a given amount of stimulus spending is, obviously, at best an imperfect estimation. But let's take the CBO's estimates as representing a rough consensus of those who favor stimulus:  for our $800 billion, we got a reduction of 0.7 to 1.8 percentage points.

Full employment is perhaps 4.5-5%.  If we assume that stimulus benefits increase linearly, that means we would have needed a stimulus of, on the low end, $2.5 trillion.  On the high end, it would have been in the $4-5 trillion range.

I'm going to go out on a limb and say that even if Republicans had simply magically disappeared, the government still would not have been able to borrow and spend $2.5 trillion in any reasonably short time frame, much less $4-5 trillion.  The political support for that level of government expansion simply wasn't there among Democrats, much less their constituents.  Even if they had found the political will, I doubt that government institutions could have effectively channeled that much new spending.  And assuming away those two problems, would lenders really have been available to fund 18% deficits at rock-bottom rates?

The CBO's numbers imply that even if we'd gotten a much larger stimulus--$1.3 trillion, say--unemployment would at best be something under 9%.  The economy would still be underperforming. 

If course, linearly-scaling stimulus benefits is a pretty heroic assumption.  Maybe they build on each other, so that the next $800 billion delivers twice the unemployment reduction of the first.  On the other hand, maybe stimulus has diminishing marginal returns, and the next $800 billion delivers half the stimulative benefits; given that most things eventually exhibit diminishing returns, given that we hopefully did the best projects first, and given all the institutional bottlenecks on the spending, I find this at least as plausible as the notion of increasing returns to stimulus.

Which raises an interesting question:  what if Keynesian stimulus works, but no one can ever actually afford to do it, short of something like World War II, where the government can tap into a patriotic outpouring of national savings by issuing bonds with negative real yields.

Presented by

Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

A New York City Minute, Frozen in Time

This wildly inventive short film takes you on a whirling, spinning tour of the Big Apple

Join the Discussion

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

Please note that The Atlantic's account system is separate from our commenting system. To log in or register with The Atlantic, use the Sign In button at the top of every page.

blog comments powered by Disqus

Video

A New York City Minute, Frozen in Time

This short film takes you on a whirling tour of the Big Apple

Video

What Happened to the Milky Way?

Light pollution has taken away our ability to see the stars. Can we save the night sky?

Video

The Faces of #BlackLivesMatter

Scenes from a recent protest in New York City

Video

Ruth Bader Ginsburg on Life

The Supreme Court justice talks gender equality and marriage.

Video

The Pentagon's $1.5 Trillion Mistake

The F-35 fighter jet was supposed to do everything. Instead, it can barely do anything.

More in Business

Just In