Macroeconomic Advisers looks at Obama's stimulus plan:
According to press reports, President-elect Obama is preparing a stimulus plan that, excluding interest on the additional government debt, will cost roughly $775 billion over two years and includes a mix of increases in direct federal spending, aid to the states, personal tax cuts, and business tax breaks. One certainly can harbor reservations about such an aggressive set of initiatives. Can government wisely spend so much money so fast? Do elements of the stimulus plan foster the achievement of sensible long-term objectives? Is the plan fiscally responsible? Does it deliver the largest bang for the buck?
On balance, however, we find such a policy could deliver the results promised for it.
Most of elements of the plan under discussion would be temporary, thereby limiting the ongoing cost of any the package. This strikes us as a reasonable balance between the needs for near-term stimulus, on the one hand, and long-term budget discipline, on the other. Further-more, the induced rise in revenues will cover roughly 40% of the static cost of the plan over a five-year budget window. Our analysis suggests that implementation of the plan would reduce the peak unemployment rate by more than 11?2 percentage points, speed the economy’s return to full employment, and reduce the risks of deflation. The plan would generate more stimulus (and more induced revenues) if it was less weighted towards corporate tax breaks for past activity, but this may the price of building the broad coalition of political support necessary to see the plan become law.
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