Saturday, November 10, 2012

"What’s the multiplier? Better, we hope..."

I'm looking at old articles on people's support for government stimulus in the wake of the "Great Recession" back in 2007 or 2008.

I found this, from Paul Krugman, published November 10th, 2008... He's worried about the impending fiscal stimulus package:
"I had a hunch that the Obama people might be thinking too small on stimulus. Now I have more than a hunch – I’ve heard an unreliable rumor!"
So, what's 'too small' look like? Conveniently, Krugman lays it out clearly:
"So what kinds of numbers are we talking about? GDP next year will be about $15 trillion, so 1% of GDP is $150 billion. The natural rate of unemployment is, say, 5% — maybe lower. Given Okun’s law, every excess point of unemployment above 5 means a 2% output gap.

Right now, we’re at 6.5% unemployment and a 3% output gap – but those numbers are heading higher fast. Goldman predicts 8.5% unemployment, meaning a 7% output gap. That sounds reasonable to me.

So we need a fiscal stimulus big enough to close a 7% output gap. Remember, if the stimulus is too big, it does much less harm than if it’s too small. What’s the multiplier? Better, we hope, than on the early-2008 package. But you’d be hard pressed to argue for an overall multiplier as high as 2.

When I put all this together, I conclude that the stimulus package should be at least 4% of GDP, or $600 billion.

That’s twice what the unreliable rumor says. So if there’s any truth to the rumor, my advice to the powers that be (or more accurately will be in a couple of months) is to think hard – you really, really don’t want to lowball this."
Good news for Paulie!

The rumor he heard was wrong, and we got an $819 billion stimulus package a couple months later - of which the CBO acknowledged $637 billion was direct spending by the Federal government. It also approved a ton of future spending, as well.

But hey! It's great that Krugman warned us about "lowballing" the stimulus, cause as we all know, that stimulus totally fixed everything, and we're all better now.

[Washington Post graphic of the stimulus package]


Julien Couvreur said...

Given that GDP is measured annually, I would assume Krugman is recommending such amount of stimulus per year (not over the course of the entire recession).

Julien Couvreur said...

Given that GDP is measured annually, I'd assume Krugman's recommendation was an amount of stimulus for one year, not over the course of the recession.

Sean W. Malone said...

I don't believe so. "Stimulus" has never been packaged as a permanent spending increase - nor would it make sense in a Keynesian world view since the goal is to pick up the "slack" of "aggregate demand" in order to jumpstart some kind of recovery.

It's not written explicitly in this article by Krugman, but it's not generally how it works, nor would the idea of spending an extra $619 billion a year forever be consistent with Krugman's other writings on Stimulus.

Julien Couvreur said...

I don't know what is the norm for Keynesian on this topic in general.
A possible interpretation (generous to Krugman) could be stimulus per year for the duration of the recession (not forever).