Since late November, ideas have been steadily leaked regarding the form of the stimulus package. So far, I have refrained from commenting since the final package will look very different from today's talk. What did prompt this post, however, is just how masterful a politician Obama is from the start. As one would expect from seasoned Washington leaders, Obama's aids have been steadily leaking ideas, no doubt to test the water and see what Wall St and Washington think.
At first it was a $300 billion plan. Then some discussion of a $700 billion plan. Now I hear reference to a $1 trillion to $1.3 trillion stimulus bill. Today's Wall Street Journal had ample detail about the part of the plan composed of just tax cuts (as opposed to spending) which totals $300 billion. Lots of good ideas and questionable ones too, in my opinion. It does appear that Obama is pushing hard to please everyone, including Republicans, with features of the plan.
Perhaps more important than the actual form of the bill, is what it hopes to accomplish. Obviously, the stimulus plan is intended to be just that- stimulus to kick start a flailing economy in the grips of a powerful credit crisis. But let's step back for a moment and look at the big picture. The U.S. is a roughly $14 trillion economy. Many estimate that GDP will contract at a 5% annual rate in the last quarter (4Q08), which appears a reasonable estimate. Say Obama's plan is $1 trillion or 7% of GDP, but is planned over 2 years. That equates to about 3.5% of GDP per year (probably less in 2009 due to a late start and more in 2010). Assuming the economy contracts at a 5% pace on its own, a 3.5% stimulus contribution (assuming it is all productively spent) won't stop growing unemployment. It will only ease the pain.
Now, it is true a 5% rate of contraction is extreme and unlikely to last more than a quarter or two, but current conditions are extreme too. No one thought the Great Depression would be as severe or last as long as it did either (I am NOT saying that is our destination though, but it is a practical historical comparison). Nonetheless, it is reasonable to view the stimulus plan not as as the golden ticket to resumed growth, but to triage.
More analysis of the full plan when we finally see it (including mention of unforseen consequences), but this was on my mind today.
Subscribe to:
Post Comments (Atom)
"Can you hope for much more than that?"
ReplyDeleteProbably not. I was only trying to put the plan into perspective, not pass judgement on it. It is exactly the notion that the plan will cure our problems that I wanted to frame.
"That seems like about as far as the feds should step in, just to cushion the bottom so that the fall isn’t quite as hard.
Or is it just a simple matter of return on investment? Is 3.5% GDP too much of an investment for the small return of a softened crash landing?"
The problem with addressing such a question is that it is a value judgement. Is another depression something a society should prevent at all costs? Exactly what is a society willing to give up to prevent or cure a recession/depression? Do such efforts result in a different problem later? I do think the undercurrent of your observation is correct: the economy is going to run its course regardless, but you don't want to intensify the pain (like the Fed in the '30s) and some attempt at easing it seems worthy.