Is Fiscal Stimulus Pointless?
The Harvard economist Robert Barro, writing in The Wall Street Journal , recently made an intelligent argument against America’s fiscal stimulus. After wading through the drivel of ethics-free Republican hacks and knowledge-free academic hacks who claim, one way or another, that the basic principles of economics make it impossible for government spending decisions to alter the flow of economic activity, reading Barro comes as a great relief.
But I think that Barro misreads how his own evidence applies to our current situation. Barro writes that he “estimate[s] a spending multiplier of around 0.4 within the same year and about 0.6 over two years.... [T]he [tax] multiplier is around minus 1.1.... [Thus,] GDP would be higher than otherwise by $120 billion in 2009 and $180 billion in 2010...,” and by $60 billion in 2011.
That means that roughly 1.3 million more people will be employed in America in 2009, 1.9 million more in 2010, and 0.7 million people employed in 2011. Suppose that what the government spent money on is worth to us two-thirds on average of what private-sector spending is worth. In that case, we will have spent $600 billion and gotten $810 billion worth of stuff in return, for a net social profit of $210 billion (and those who would otherwise be cyclically unemployed cannot be said to place a high value on their lost leisure).