Tuesday, November 25, 2008

Greg Mankiw on Obama’s Fiscal Stimulus Proposal

Does Greg Mankiw have a good point here:

Dividing one number by the other, that works out to $280,000 per job. What is going on here? Logically, it must be one of three possibilities: 1. The fiscal stimulus is going to be much smaller than is being reported. 2. The new administration is setting a low bar for itself when it comes to job creation. 3. The Obama team believes in very small fiscal policy multipliers.

Greg is reviewing to this:

Facing an increasingly ominous economic outlook, President-elect Barack Obama and other Democrats are rapidly ratcheting up plans for a massive fiscal stimulus program that could total as much as $700 billion over the next two years ... Obama has set a goal of creating or preserving 2.5 million jobs by 2011.

To be fair, I praised the size of the proposed stimulus and I also wondered why there was such a low bar for job creation over the first two years.

But let me suggest an alternative explanation (as opposed to low multipliers) based on something the President-elect has said about things getting worse before they get better. Could it be that his economic team expects employment to fall even further before this proposed stimulus turns things around? For example – suppose we wake up in the New Year to an 8 percent unemployment rate which would translate into about 3.5 million jobs lost. To get a net increase of 2.5 million new jobs would mean we would have to see 6 million jobs created over the next two years. If the actual fiscal stimulus were $500 million, then we are talking about $83 thousand not $280 thousand. And the implied multiplier would be closer to 1.2 not 0.36.

1 comment:

TheTrucker said...

The same old game. Everybody back under the house. Change partners. And so it goes in these United States. Lost opportunity and stifling because of politics and the Democratic lust to create another "New Deal".

What is wrong here is the retrograde mentality of what needs to be done. Left to the states it will be automobile and truck infrastructure repair and extension, a pittance for education all going to math and science (none to CLASSICAL economics (the stuff that non math people can understand) or civics), and a lot of "good old boy" handouts. And the reason is obvious:
Doing anything new will require much more sniffing around to see where the campaign funds will best be realized.

About the only thing that the American people and the politicians are ready for is perhaps some early rollout of cars that use less petroleum based fuels and maybe some scrubbers for the coal fired electrical generators. All the rest will be too difficult for politicians to deal with.

The Republicans will continue to block everything in the Senate no matter how supportive the majority of the American people might be. The nuclear option once threatened by the Republicans may be the only real answer. Much of the moronic non-government idiocy has been removed, but unless the stimulus package can be put through the congress as a reconciliation bill bypassing the filibuster then there is little hope of any real progress. Grover Norquist and company will continue to haunt Washington.