NCPA - National Center for Policy Analysis


June 30, 2009

The effectiveness of President Obama's $787 billion economic stimulus depends on the "multiplier effect," which holds that an increase in government spending will yield a multiple increase in aggregate spending by the individuals and businesses that receive the money.  For its stimulus package, the Obama administration is assuming a multiplier of 1.5; that is, for every $1 of additional government spending, gross domestic product (GDP) will increase $1.50.  However, an analysis of data on federal outlays and GDP for fiscal years 1947-2007 shows that the multiplier coefficient is 0.46, meaning that a dollar's worth of additional federal government spending yields about 50 cents worth of additional GDP, says the late economist Gerald W. Scully, a former senior fellow with the National Center for Policy Analysis. 

Assuming that 75 percent of the $787 billion in stimulus money will be spent in 2009 and 2010, as the Obama administration expects, and that all the monies will stimulate the economy -- for example, a dollar's worth of food stamps has the same impact on GDP as a dollar's worth of road construction -- the result is:

  • The $300 billion in stimulus spending in 2009 will yield about $138 billion or 1 percent of additional GDP.
  • This is less than one-fifth of the decline in annual GDP as a result of the recession, most recently estimated to be about $938 billion.
  • More realistically, if only half of the monies are spent in 2009 and 2010 and only about half of the spending is stimulative, it will yield $47 billion in additional output, which is roughly 5 percent of the GDP lost in the recession.
  • If the federal budget deficit is on the order of $1 trillion per year for 2010-2012, as the Obama administration has signaled, the federal debt will total approximately $15 trillion by the end of 2012, and it will more or less equal 100 percent of GDP.

The Congressional Budget Office (CBO) asserts that government borrowing to service this debt will tend to reduce the stock of productive capital.  In their judgment, the stimulus bill actually will lead to a lower rate of growth in 2012 and subsequent years.  After a decade, according to the CBO, national output will be lower than if no stimulus bill had been passed.

A principal justification for the huge fiscal intervention in the economy is to reverse the decline in employment.  However, a 1 percentage-point increase in the rate of economic growth is associated with a decline in the unemployment rate of only 0.12 percentage points.  Thus, it will take several years of vigorous economic growth to return to a 5 percent unemployment rate.  With sluggish growth, it could take many years, says Scully.

Source: Gerald W. Scully, "Fiscal Policy and Economic Recovery," National Center for Policy Analysis, Study No. 322, June 30, 2009.

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