Tuesday, February 10, 2009

Becker and Murphy Say the Short-Term Benefit of the Stimulus Package Will Be Less Than Expected - WSJ.com

The Wall Street Journal has an interesting look at what the impact of the stimulus package might actually be.

Becker and Murphy Say the Short-Term Benefit of the Stimulus Package Will Be Less Than Expected - WSJ.com:
"...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"
They list five other points as well including:
"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."

Which is not to say the current stimulus plan should or should not be passed, but merely that the benefits may be less than hoped.

BTW As Becker is a Nobel Prize winner in economics. So his words carry some additional weight.

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