Wednesday, October 14, 2009

To Stimulate or Not to Stimulate

In this article, Daniel Gross argues that complaints about the failure of the stimulus package are wrong because most of the money hasn't been spent. Yet there are signs of a possible recovery. Here is Brad Delong quoting the data suggesting a 4% GDP growth rate for the quarter. I keep hearing on the radio that economists suspect the recession may be over, or will be over soon.

If the stimulus hasn't done much yet because not much of it has been implemented, and if we are nonetheless headed for recovery, doesn't this suggest that there exists a self-correcting mechanism for the macroeconomy, and that it seems to be working? Daniel Gross argues that this is all going exactly according to plan--things are starting to recover right now because of the $200 billion or so that have already been spent. $200 billion is not chump change, but if it really is responsible for the uptick in economic growth, the multiplier must be bigger than previous estimates. Once again, the inability to do the counterfactual experiment hinders macroeconomics: we will never know how long it would have taken the economy to recover had we not spent $787 billion on stimulus. If Arnold Kling's macroeconomic readjustment story is correct, we could find ourselves spending a lot of money to just postpone the pain for a little while.

1 comment:

mhammoc said...

Along that line of thinking, if we are indeed coming out of the recession with little or no stimulus impact, then would it not make sense to stop spending any more stimulus $$ now, rather than continuing to increase the deficit?