NCPA - National Center for Policy Analysis


February 10, 2009

How much increase in gross domestic product (GDP) can be expected from the economic stimulus package, ask Gary S. Becker, the 1992 Nobel economics laureate; and Kevin M. Murphy, a MacArthur Fellow; both senior fellows with the Hoover Institution.

In a full-employment situation, increased government spending would largely replace private spending, so the net stimulus to GDP would likely be quite small.  In the present environment, however, with growing unemployment of both labor and capital, the net stimulus would be larger since the additional government spending would put some unemployed resources to work.

For example:

  • If the government spent money to build new homes with unemployed labor, the stimulus to GDP might be close to, even larger than, the amount spent.
  • However, given the present housing glut, that hardly seems to be a wise policy, although it is a small part of both the House and Senate stimulus packages.

In fact, much of the proposed spending would be in sectors and on programs where the government would mainly have to draw resources away from other uses.  This type of spending includes adding broadband to rural areas, spending more on health coverage, encouraging scientific innovations, developing renewable energy, as well as many other things.

As President Barack Obama recently said, "This plan is more than a prescription for short-term spending -- it's a strategy for America's long-term growth and opportunity in areas such as renewable energy, health care and education."  Such spending may encourage long-term growth, but it will have little short-term effect on GDP, say Becker and Murphy.

The two conclude that the net stimulus to short-term GDP will not be zero, and will be positive, but the stimulus is likely to be modest in magnitude.  Some economists have assumed that every $1 billion spent by the government through the stimulus package would raise short-term GDP by $1.5 billion.  Or, in economics jargon, that the multiplier is 1.5.

That seems too optimistic given the nature of the spending programs being proposed.  Becker and Murphy believe a multiplier well below one seems much more likely.

Source: Gary S. Becker and Kevin M. Murphy, "There's No Stimulus Free Lunch; It's hard to spend wise and spend fast," Wall Street Journal, February 10, 2009.

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