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.Good news for Paulie!
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."
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]