Becker and Murphy on the Stimulus

1) How much increase in Gross Domestic Product (GDP) can be expected from the stimulus package?

So our conclusion is that the net stimulus to short-term GDP will not be zero, and will be positive, but the stimulus is likely to be modest in magnitude. Some economists have assumed that every $1 billion spent by the government through the stimulus package would raise short-term GDP by $1.5 billion. Or, in economics jargon, that the multiplier is 1.5.

That seems too optimistic given the nature of the spending programs being proposed. We believe a multiplier well below one seems much more likely.

2) The increased government spending in the stimulus package is supposed to be only temporary, until the economy returns to a full employment level, but probably won't be.

The evidence of past expansions of government programs is just the opposite. Once created they tend to survive and grow over time, even when the increases initially were said to be temporary. The underlying reason for this is that interest groups develop around new and expanded programs, and they lobby to keep and expand those programs.

3) The effects on consumers and businesses of the stimulus package depend not only on the stimulus to short-term GDP, but also on how valuable the spending is.

It is extremely difficult for any group, private as well as public, to spend such a large sum wisely in a short period of time...

Many Democrats saw the stimulus bill as a golden opportunity to enact spending items they've long desired. For this reason, various components of the package are unlikely to pass any reasonably stringent cost-benefit test.

4) There are no free lunches in spending, public or private.

The increased federal debt caused by this stimulus package has to be paid for eventually by higher taxes on households and businesses. Higher income and business taxes generally discourage effort and investments, and result in a larger social burden than the actual level of the tax revenue needed to finance the greater debt. The burden from higher taxes down the road has to be deducted both from any short-term stimulus provided by the spending program, and from its long-run effects on the economy.

read the WSJ article

Obama's Spending Bill

"What do you think a stimulus is?" Obama asked incredulously. "It’s spending —that's the whole point! Seriously.”

source and article


"If you knew a bill in the U.S. Senate would cause a recession in 10 years, would you support it?" asked Sen. Jon Kyl, R-Arizona. "That's what the Congressional Budget Office, the bipartisan office that supports our efforts in the Congress, says about this legislation ... there will be negative GDP (Gross Domestic Product) in this decade as a result of this legislation."

Sen. Barbara Boxer, D-California, told opponents of the bill to "get over it."

read the CNN story

My thoughts: We are dealing with a group of economic illiterates who are convinced that the economy can be manage and that we can spend ourselves into prosperity.