Friday, January 30, 2009

Will the Stimulus Package Work?

How effective will the stimulus package be? There are three basic questions to keep in mind in looking at H.R. 1, which passed the House earlier this week:
How quickly will the money hit the street? The sooner the money starts circulating, the better.
What assets will be created by the bill? If we’re going to take on billions in debt, it would be nice to have some assets to show for it.
And how permanent are the programs? When the economy gets going again, we will need to reduce the federal deficit.
Some programs in the bill will hit the street faster. In a presentation to Congress last November, economist Mark Zandi defined the
"bang for the buck" as the "one year $ change in GDP for a given $ reduction in federal tax revenue or increase in spending."
According to Zandi, chief economist at Moody's Economy.com and a former adviser to John McCain, social programs like food stamps and unemployment benefits provide the biggest bang for the buck in terms of economic effect in one year. Those collecting unemployment benefits or food stamps usually spend it all by the end of the month.
Infrastructure spending is also effective at pumping money into the economy quickly, with the advantage of creating useful assets. Improved roads, bridges and rail systems provide long term economic benefits by helping speed goods to markets and workers to jobs. Implementing smart grid technology will make renewable energy sources more economical for end users.

By the way, Zandi calculates that permanent tax cuts (which create large permanent impacts on budget deficits) provide the least bang for the buck.
Finally, the stimulus package should be temporary. When the economy starts to recover, public spending will need to come down so as to not choke off private sector investment. The tax cuts are designed to be temporary as well.
The CBO cost estimate released on Monday is a little out of date, since a a couple of programs were taken out and mass transit funding was increased. But it still provides a useful guide to the budget impact over the next several years:
The net impact on the deficit peaks in fiscal year 2010, and declines sharply thereafter. The package pumps a lot of money into the economy in the next several years, but doesn't create a long range fiscal burden.

2 Comments:

Anonymous kavips said...

By the way, thanks for discovering and publishing the chart....

1:40 PM, February 02, 2009  
Blogger TommyWonk said...

Nothing like some actual data to inform the conversation.

1:50 PM, February 02, 2009  

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