Harvard economist Robert Barro has a piece in the Wall Street Journal estimating the results of the 2009 stimulus bill. He estimates the multiplier (that’s the amount by which the economy grows for a given amount of fiscal stimulus) at 0.4 for the first year and 0.6 for the second. Let’s call it 0.5 overall.
That means that $300 billion in government spending comes at the cost of $150 billion in reduced private-sector activity. So, if at least half the stimulus spending is worthwhile, society as a whole is better off, having obtained more than it gave up. On the other hand, if at least half of the stimulus is wasted, then society is worse off. You can judge for yourself which is more likely.
But that’s just one side of the ledger. Increased government spending comes at the price of higher taxes, either now or at some future date. Barro estimates the tax multiplier at -1.1. (He notes Christina Romer, the president’s chief economic advisor, has found the tax multiplier to be even worse.) That means that the taxes to pay for $300 billion in spending result in $330 billion in reduced economic activity.
Put these together and you get a combined multiplier of -0.6. That means that every $300 billion in fiscal stimulus makes society worse off by $180 billion. And that’s assuming that not one cent of the stimulus is wasted. If half of the stimulus is wasted (which strikes me as a bare minimum), we’re $330 billion worse off.
In short, the 2009 stimulus bill was a complete disaster. And we just passed another one.
POSTSCRIPT: Interestingly, the Obama administration assumed a spending stimulus of about 1.5. It’s completely unsupported (they basically concede this). but it’s an interesting number. It means that after the -1.1 tax multiplier, we would still be 0.4 ahead, so the stimulus would better society if at least 60% of its spending were worthwhile. It strikes me that 40% is just about the lowest number that could possibly be argued for stimulus waste, so it seems as though the administration’s multiplier guess is the lowest number that could justify its plan. In other words, it seems that the Obama administration determined the number by working backwards from the plan’s desired outcome.
Internet Scofflaw 