The Stimulus Package Considered against a Deteriorating Macro Backdrop

Here are the latest CBO forecasts of the output gap and unemployment rate, as well as counterfactual gap and rate that would have taken place in the absence of the stimulus package.

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synch3.gifSource: CBO, A Preliminary Analysis of the President’s Budget and an Update of CBO’s Budget and Economic Outlook, March 2009.Notice that the no-stimulus counterfactual output gap and unemployment rates are noticeably worse now than only a month ago (see this post). For 2010, the February counterfactual was -6.3% of GDP, now around -10%; the February counterfactual for 2010 was 8.7% unemployment, now it’s nearly 11% (I’m eyeballing the current counterfactuals off of Figures 2-1 and 2-2). The January outlook is discussed here. My guess is that that “massive” stimulus is going to look a lot less “massive” given the severity and duration of this recession.For those wondering how these estimated effects were obtained (i.e., multipliers), see [1], [2], [3], [4], [5]; for discussion of the stimulus package, see [6], [7].Even these forecasts are conditional upon the current outlook regarding growth abroad (and hence net exports), which I think are overly optimistic. My worry is that rest-of-world growth will continue to surprise on the downside. Here’s the IMF’s take on how world output growth has plunged in 2008 (y/y):

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Source: IMF, Global Economic Policies and Prospects: Note by the Staff of the International Monetary Fund, March 13-14, 2009.By the way, previously I’ve argued that the critique of fiscal policy as being ill-timed was largely irrelevant if the negative output gap is long-lived (as it is in the CBO projections). But this paper concludes:

This paper has explored the conventional wisdom that monetary policy in the G7 is a reliable countercyclical tool while discretionary fiscal policy fails to provide fiscal stimulus during downturns. The analysis confirms that monetary policy has been consistently timely and strongly countercyclical in downturns across a range of measures. The assessment of fiscal policy, however, is more nuanced than its common perception. Discretionary fiscal actions have mostly been delayed and pro-cyclical in continental European countries and Japan, but have generally been countercyclical and more timely in Anglo-Saxon countries….

So I am more sanguine than others about what fiscal policy can accomplish in the US.


Originally published at Econbrowser and reproduced here with the author’s permission.

One Response to "The Stimulus Package Considered against a Deteriorating Macro Backdrop"

  1. Guest   March 24, 2009 at 8:31 am

    Finally a voice with common sense. Way too much Kool Aid being passed around lately.It sucks to be right.