Unexpectedly Intriguing!
July 28, 2009

Economic Stimulus!Are you a DC policy wonk looking to work out how much economic growth you might be able to squeeze out of that next economic stimulus package? Or maybe you're playing along at home and you'd like to work out why the last one would not seem to be working very well at all.

If either of these describe you, we can help! Our latest tool adapts math developed by the University of Chicago's Kevin Murphy, which may be used to determine the likely effectiveness of that economic stimulus package you might be considering!

Or rather, it could figure out what the net gain from an economic stimulus package might be, if only you could work out what values you should use for all the different parts of it. But then, we're putting those factors in your hands with this tool. Just use it responsibly with reasonable assumptions (not like this guy did). As you play with the tool, you'll find that your outcome will hinge on the assumptions you enter, including:

  • How inefficient you believe the government is in generating new economic activity. In other words, how much of the new government spending will go to current productive activity or to redirecting current productive activity instead of generating genuinely new economic activity.

  • How much new economic activity is generated for every dollar of new government spending. Many supporting the current Obama administration's spending initiatives believe this figure is as high as 157%. Others, drawing upon new research findings, would place it somewhere between 50 and 60%.

  • The percentage of currently idle resources that will be drawn into new, productive economic activity as a result of the stimulus. This is a factor that might be hampered by such things as the need to relocate the resources or the ability to adequately match the requirements of the new economic activity with the capabilities of those available idle resources. Generally speaking, the more idle resources you can get to work, the bigger the bang for your buck. For the sake of the tool though, you'll enter the percentage of those idle resources that will remain idle - who won't be drawn into productive activity as a result of the government's stimulus spending, and where a smaller value would represent the more desirable, but perhaps not achievable, outcome.

  • As we've indicated elsewhere, if U.S. politicians act as their predecessors have in the past, since the new spending is generating large deficits, we can reasonably expect that higher taxes will be needed to support the government's borrowing. That creates a deadweight loss, in that people will act to limit their exposure to the new taxes in a way that reduces economic activity. Martin Feldstein, the former head of the National Bureau of Economic Research, estimates this effect to be $0.76 for every additional dollar of personal income tax revenue the government collects. Update 30 July 2009: Meanwhile, the non-partisan Tax Foundation puts the deadweight loss of additional tax collection at $0.40, estimating that it will cost the federal government $1.40 for every $1.00 it collects in new taxes. (HT: King Banaian.)

Got all that? Then you're ready! We've entered Kevin Murphy's assumed values and set the stimulus value for $787 billion dollars:

Economic Stimulus Package Data
Input Data Values
Amount of the Increase in Government Spending Intended to "Stimulate" New Economic Activity [USD]
Government Inefficiency Factor (What percentage of the new government spending will not go toward things that genuinely "stimulate" new economic activity?) [%]
Keynesian Multiplier (What percentage of New Economic Activity will be generated by currently Idle Resources with respect to the level of New Government Spending?) [%]
Relative Value of the Idle Resources (What percentage of all currently Idle Resources will remain idle despite the New Government Spending?) [%]
Deadweight Loss per Dollar of New Tax Revenue Needed to Support the Level of New Government Spending [USD]


Will the Proposed Economic Stimulus Work?
Calculated Results Values
Net Gain from Economic Stimulus [USD]
The Bottom Line

The goal, of course, is for the proposed economic stimulus to realize a positive net gain. If you can't do that with realistic assumptions, the nation will be better off without the stimulus spending.

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