Stimulus Math


STIMULUS MATH….Goldman Sachs says we’re about to suffer the deepest recession since World War II, with unemployment expected to top 8.5% next year and maybe inching a little higher in 2010. So how big should a stimulus package be given the size of the economic tsunami we’re headed into? Paul Krugman tells us today that since Okun’s Law suggests that every point of unemployment above 5% represents a 2% output gap, an 8.5% unemployment rate means that the economy is performing 7% under its potential:

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.

Given the likely length of this recession, we’ll probably need nearly this much again in 2010. Call it an even trillion bucks when it’s all said and done.

As recently as a few months ago that would have seemed unimaginably large to me. Today, not so much. Stimulate away, President Obama.

Fact:

Mother Jones was founded as a nonprofit in 1976 because we knew corporations and the wealthy wouldn’t fund the type of hard-hitting journalism we set out to do.

Today, reader support makes up about two-thirds of our budget, allows us to dig deep on stories that matter, and lets us keep our reporting free for everyone. If you value what you get from Mother Jones, please join us with a tax-deductible donation so we can keep on doing the type of journalism that 2018 demands.

Donate Now